What is DEMAND??? Need/ Want /Desire Willingness to Pay Ability to Pay Definition: “Demand” is the relationship between the prices of a commodity & the amounts of the commodity which consumers want to purchase at those prices. According to Prof. Hibdon,“ Demand means the various quantities of goods that would be purchased per time period at different prices in a given market.”

Demand for a commodity has always a reference to a “Price” a “Period of Time” and a “Place”. TYPES OF DEMAND: Individual Demand Market Demand Demand of A Demand of B Demand of C Market Demand 5 7 3 15

Determinants of Demand Price of good x (Px) Prices of substitutes of x (Ps) Prices of compliments of x (Pc) Consumer’s tastes & preferences (T) Consumers’ expectations about future prices (Ep). Consumers’ expected future incomes (Ey)

Number of consumers (N) Distribution of consumers (D) Other determinants (u) DEMAND FUNCTION : Dx= f (Y,Px,Ps,Pc,T,Ey,Ep,N,D,u)

Demand schedule : A demand schedule is a table showing how much of a given product a household would be willing to and able to buy at different prices. Demand curves are usually derived from demand schedules.

Demand curve The demand curve is a graph illustrating how much of a given product a household would be willing to buy at different prices.

Factors affecting Demand (Determinants of Demand) A household’s decision about the quantity of a particular product demanded depends on: 1. The price of the product in question. 2. The income available to the household. 3 The prices of other products (substitutes and complements) available to the household. 4. The household’s tastes and preferences. 5. The household’s expectations about future income, wealth, and prices.

Assumption of Law of Demand We use “all else equal” device, to examine the relationship between the quantity demanded of a good per period of time and the price of that good, while holding income, wealth, other prices, tastes, and expectations constant. (In Latin, it is called “Ceteris paribus”)

The Law of Demand Price and Quantity Demanded: The law of demand states that there is a negative, or inverse, relationship between price and the quantity of a good demanded and its price. This means that demand curves slope downward.

LAW OF DEMAND According to Bilas, “The Law of Demand states that other things being equal, the quantity demanded per unit of time will be greater, the lower the price and smaller, higher the price.”

Reasons for the Law of Demand Substitution Effect Income Effect New consumers Different uses of the commodity

Exceptions to the Law of Demand 1. Inferior goods or Giffen goods : Sir Giffen pointed out that in the case of English workers the Law of Demand does not apply to bread. With a fall in the price of bread its amount demanded was reduced rather than being more than before. Their 2 main items of consumption are: 1. Bread 2. Meat. As the price of bread fell in the market, they could purchase the same amount of bread with less money. The money saved thereby was not spent on purchasing more bread. Rather it was spent on purchasing more of meat, a superior commodity for the English workers. This reduced the demand for bread as its price went down.

2. Articles of Distinction (Veblen Goods): This exception was first explained by the American economist, Veblen. E.g. Diamond and expensive Jewellery. Their demand is more when their price is high 3. Expectation of rise and fall in price in future: If people expect a rise in price in future, they will rush to purchase more of the commodity at the present price and vice - versa. E.g. Onion, Real Estate etc.

4. Ignorance on the part of consumers about quality It happens many times that consumers judge the quality of a commodity from its price. In such cases, a lower priced commodity may be considered inferior and purchasers buy lesser amount of it. But when its price is more they consider it to be superior & may purchase more of the commodity than before.

Shift of Demand VS. Movement Along a Demand Curve A higher price causes lower quantity demanded and a move along the demand curve DA. Changes in determinants of demand, other than price, cause a change in demand, or a shift of the entire demand curve, from DA to DB.

Movement along demand curve VS. shift of the demand curve To summarize: Change in price of a good or service leads to Change in quantity demanded (Movement along the curve). Change in income, preferences, or prices of other goods or services leads to Change in demand (Shift of curve).

The Impact of a Change in Income Higher income decreases the demand for an inferior good Higher income increases the demand for a normal good

The Impact of a Change in the Price of Related Goods Demand for complement good (ketchup) shifts left Demand for substitute good (Poha / chicken) shifts right Price of hamburger rises Quantity of hamburger demanded per month falls

Elasticity

Elasticity – the concept The responsiveness of one variable to changes in another When price rises, what happens to demand? Demand falls BUT! How much does demand fall?

Elasticity – the concept If price rises by 10% - what happens to demand? We know demand will fall By more than 10%? By less than 10%? Elasticity measures the extent to which demand will change

Elasticity 3 basic types used: Price elasticity of demand Income elasticity of demand Cross elasticity of demand

Elasticity Price Elasticity of Demand The responsiveness of demand to changes in price Where % change in demand is greater than % change in price – elastic Where % change in demand is less than % change in price - inelastic

Elasticity The Formula: % Change in Quantity Demanded ___________________________ Ped = % Change in Price If answer is between 0 and -1: the relationship is inelastic If the answer is between -1 and infinity: the relationship is elastic Note: PED has – sign in front of it; because as price rises demand falls and vice-versa (inverse relationship between price and demand)

Elasticity Price (£) Quantity Demanded The demand curve can be a range of shapes each of which is associated with a different relationship between price and the quantity demanded. Quantity Demanded