भारतीय अर्थव्यवस्था

Consumer Demand

September 15, 2021
edusingh

human capital

Consumer Demand:-

It refers to the quantity of a commodity that a consumer (or group of consumers taken together) are willing and able to buy at a particular price during a given period of time.

 Demand:- “Other things being Constant” when a consumer is ready to buy the quantity of a commodity at a given price, it is called quantity demanded. But when a consumer buys different quantities of a commodity at different prices, it is called demand for the good.

There must be three elements for Consumer demand:-

1. Desire to acquire the good.
2. Adequate resources (money) to obtain the commodity
3. Readiness to spend resources

Consumer Demand Type:-

1. Price Demand:- “Other things being equal” but when a proportional or functional relationship is found between the price of a commodity and its quantity demanded, then it is called price demand of the commodity. There is a negative relationship between price and demand.

2. Income Demand:- “Other things being equal” when the functional relationship found between the income of a consumer and the quantity of a commodity is called income demand for that good. Generally, there is a positive relationship between the income of the consumer and the demand for the commodity.

3. Cross demand:- “Other things being equal” but when there is a proportional relationship between the price of commodity X and the demand for commodity Y, then it is called skew or skewed demand. This relationship is found between two types of objects:-
(1) Complementary goods
(2) substitute goods

4. Direct Demand:- When a commodity is directly demanded by the consumer to satisfy his needs, then such demand is called direct demand. For example, drinking water when thirsty is a clear example of direct demand.

5. Indirect Demand / Derived Demand: – When a commodity is demanded for other goods made with its help, then it is called indirect demand. In simple language, derived demand of a commodity is that which is not generated by itself but for some other commodity. Demand is made for the production of goods just as the demand for the means of production is derived demand.

6. Combined demand:- When many goods are demanded simultaneously to satisfy a particular need, then it is called joint demand. For example, the demand for milk, sugar, water, gas and tea leaves is a combined demand to meet the demand for tea.

7. Collective demand:- When a single commodity is used to satisfy many needs, then the demand for that good is called collective demand. Eg:- Demand for milk or electricity.

Individual Demand

It refers to the quantity of a good that a consumer is willing and able to buy at a given price during a given period of time.

Market Demand

It refers to the quantity of a good that all consumers taken together are willing and able to buy at a given price during a given period of time.

Demand Function

It gives the functional relationship between demand for a good and the factors affecting demand.

Dx = f(P, Pr, Y, Yd, T, G, S &P, E)

  • Where P is the own price of the good
  • Pr is the price of related goods
  • Y is the income of the consumer
  • Yd is Distribution of Income
  • T & P is tastes and preferences of the consumer
  • G is Government Policy
  • S is Weather and Climate (Season)
  • P is Size and Composition of Population
  • E is the expectation of change in price in future

Determinants of demand (individual demand)

Own price of the commodity:- There exists an inverse relationship between price and quantity demanded of a commodity keeping all other factors affecting demand constant. It means, as price increases, quantity demanded falls. For example, If price of given commodity (say, tea) increases, its quantity demanded will fall . This relation is given by the Law of Demand.

The following determinants are termed as ‘other factors’ or factors other than own price.

Price of related goods:- Related goods are the goods in which change in price of one good (say,x) causes a change in the demand for other good (say, y). Related goods are of two types:

(1 ) Substitute Goods:-Substitute goods are those goods which can be used in place of one another for satisfaction of a particular want.

        • An increase in the price of substitute good makes the given good relatively cheaper in comparison to its substitute and so leads to an increase in the demand for given good.
        • A decrease in the price of substitute good makes the given good relatively costlier in comparison to its substitute and so leads to a decrease in the demand for given good.

For example:- If price of a substitute good (say, coffee) increases, then demand for given good (say, tea) will rise as tea will become relatively cheaper in comparison to coffee. So, demand for a given good is directly affected by change in price of substitute goods. Hence , there is a direct relationship between the price of substitute good and demand for the given good.

(b) Complementary Goods:-  Complementary goods are those goods which are used jointly to satisfy a particular want.

        • An increase in the price of complementary good makes the joint consumption of the given good with the complementary good costlier which leads to a decrease in the demand for the given good.
        • A decrease in the price of complementary good makes the joint consumption of the given good with the complementary good cheaper which leads to an increase in the demand for the given good.

For example:- If price of a complementary good (say, sugar) increases, then demand for given good (say, tea) will fall as it will be relatively costlier to use both the goods together.

Hence , there is an inverse relationship between the price of complementary good and demand for the given good.

Income of the consumer:- The effect of change in income on demand depends on the nature of the commodity under consideration.

 

(1 ) Normal Good:- Normal goods refer to those goods whose demand increases with increase in income (or whose demand decreases with decrease in income) of the consumer.

      • There is a direct relationship between income of the consumer and demand for the normal good. For example: If with an increase in income of the consumer, demand for wheat rises, it is a normal good for the consumer.

 

(2 ) Inferior Good:- Inferior goods refer to those goods whose demand decreases with increase in income (or whose demand increases with decrease in income) of the consumer.

      • There is an inverse relationship between income of the consumer and demand for the inferior good. For example: If with an increase in income of the consumer, demand for Bajra falls, it is an inferior good for the consumer.

 

Tastes and preferences :- Tastes and preferences of the consumer directly influence the demand for a commodity. They include changes in fashion, customs, habits, etc.

    • If there is a favourable change in tastes and preferences, then the demand for such a commodity rises.
    • On the other hand, demand for a commodity falls, if there is an unfavourable change in tastes and preferences for the commodity.

 

Expectation of change in price in future :- If the price of a good is expected to rise in future, people will buy more of the good in the current period. For example: If price of petrol is expected to rise in future, its present demand will increase.

Size of the family:- The demand for commodities depends on the size of the family. If the size of the family is large then the demand for the goods will be high but if the size of the family is small then the quantity demanded of the goods will be less.

 

Determinants of market demand

Market demand is influenced by all the factors affecting individual demand for a commodity. In addition, it is also affected by the following factors:-

Size and Composition of Population :- Market demand for a commodity is affected by size of population in the country. An increase in population raises the market demand, while a decrease in population reduces the market demand for a commodity. Composition of population, i.e. ratio of males, females, children and number of old people in the population also affects the demand for a commodity. For example: If a market has larger proportion of women, then there will be greater demand for articles of use for women such as women’s clothes, cosmetics etc.

Distribution of Income :- If income distribution is in favour of the rich, there will be more demand for luxuries while if the income distribution is in favour of the poor, necessities would be demanded more.

Government Policy :- The market demand of goods depends on the budget policy of the government. If a tax is imposed on the goods by the government, then the price of that commodity increases in the market. Due to this its demand decreases. Similarly, if the government wants to increase the demand for a commodity, it either reduces or removes the tax levied on that commodity. Due to which the demand for goods increases due to the fall in the price of the goods.

Weather and Climate (Season):- The things which are affected by the weather which are called woolen clothes, snow, rain coat etc. Their demand increases with the onset of the season and decreases sharply at the end of the season. The demand for ice, cold drinks increases during summer but their demand is less in winter.

Law of Demand

The law of demand states that there is an inverse relationship between change in price of a good and the consequent change in quantity demanded for that good, keeping all other factors affecting demand constant (ceteris paribus).

‘Other factors’ refer to the income of the consumer, price of related goods (prices of substitute and complementary goods) and consumer’s tastes and preferences.

Assumptions of Law of demand:-

While stating the law of demand, we use the phrase ‘keeping other factors constant or ceteris paribus’. This phrase is used to cover the following assumptions on which the law is based:

1. Prices of substitute goods do not change.

2. Prices of complementary goods remain constant.

3. Income of the consumer remains the same.

4. There is no expectation of change in price in the future.

5. Tastes and preferences of the consumer remain the same.

Reason behind the Law of Demand :-

  1. Law of Diminishing Marginal Utility :– Since the marginal utility declines as a consumer consumes more units of a good, he will be willing to pay a price equal to the marginal utility derived from that unit of good. (MUx = Px). Thus, he will demand more units only at a lower price.

Proving the Law of Demand using Utility Approach

Single good case:-

Equilibrium condition: : MUx = Px

 

Now if the price of X falls,

Then, MUx > Px i.e. Marginal utility in terms of money is greater than the price of the good.

  • Benefit received from the last unit consumed is more than cost for that unit, hence the consumer will consume more of good X.
  • As he consumes more of X, MUx declines (due to Law of DMU).
  • This continues till MUx = Px and equilibrium is attained.

Conversely, if the price of X rises, less of X is demanded.

 

Hence, as price falls, more of X is demanded showing an inverse relationship between price and quantity demanded of a commodity which proves the Law of Demand

Two goods case:

Equilibrium condition:- \dpi{150} \frac{MUx}{px} = \dpi{150} \frac{MUy}{py}

(MU from last rupee spent on X equals MU from last rupee spent on of Y)

Now if the price of X falls: \dpi{150} \frac{MUx}{px}> \dpi{150} \frac{MUy}{py}

It means MU from last rupee spent on X is greater than MU from last rupee spent on Y.

  • The consumer prefers X to Y.
  • He will consume more of X and less of Y since income and prices are fixed.
  • Due to Law of Diminishing Marginal Utility, MUx falls and MUy rises.
  • This continues till  \dpi{150} \frac{MUx}{px} = \dpi{150} \frac{MUy}{py} and equilibrium is restored.

Conversely, if the price of X rises, less of X is demanded.

Hence, as price falls, more of X is demanded showing an inverse relationship between price and quantity demanded of a commodity which proves the Law of Demand

Other Factors Are :–

2. Substitution Effect:-

Substitution effect refers to substituting one commodity in place of other when it becomes relatively cheaper. When price of the given commodity falls, it becomes relatively cheaper as compared to its substitute (assuming no change in price of substitute). As a result, demand for the given commodity rises.

For example, if price of given commodity (say, Pepsi) falls, with no change in price of its substitute (say, Coke), then Pepsi will become relatively cheaper and will be substituted for coke, i.e. demand for Pepsi will rise.

3. Income Effect:-

Income effect refers to effect on demand when real income of the consumer changes due to change in price of the given commodity. When price of the given commodity falls, it increases the purchasing power (real income) of the consumer. As a result, he can purchase more of the given commodity with the same money income.

For example, suppose Isha buys 4 chocolates @ Rs. 10 each with her pocket money of Rs. 40. If price of chocolate falls to Rs. 8 each, then with the same money income, Isha can buy 5 chocolates due to an increase in her real income.

‘Price Effect’ is the combined effect of Income Effect and Substitution Effect. Symbolically: Price Effect = income Effect + Substitution Effect. For a detailed discussion on Income Effect and Substitution Effect, refer Power Booster.

4. Additional Customers :-

When price of a commodity falls, many new consumers, who were not in a position to buy it earlier due to its high price, starts purchasing it. In addition to new customers, old consumers of the commodity start demanding more due to its reduced price.

For example, if price of ice-cream family pack falls from Rs. 100 to Rs. 50 per pack, then many consumers who were not in a position to afford the ice-cream earlier can now buy it with decrease in its price. Moreover, the old customers of ice-cream can now consume more. As a result, its total demand increases.

5. Different Uses:-

Some commodities like milk, electricity, etc. have several uses, some of which are more important than the others. When price of such a good (say, milk) increases, its uses get restricted to the most important purpose (say, drinking) and demand for less important uses (like cheese, butter, etc.) gets reduced. However, when the price of such a commodity decreases, the commodity is put to all its uses, whether important or not.

 

Demand Schedule and Demand Curve:-

Individual demand schedule:-

It is a table showing various quantities of a commodity that a consumer is willing and able to buy at different prices during a given period of time assuming no change in other factors affecting demand.

Individual Demand Schedule
Price of Coffee ( per kg) Quantity (kg)

 
700 30
600 40
500 50

 

Individual demand curve:-

It is graphical representation of the individual demand schedule such that each point on the curve shows the quantity of a good that an individual consumer is willing and able to buy at a given price during a given period of time assuming no change in other factors affecting demand.

Individual Demand Curve 

As price falls from ₹ 600 to ₹ 500, quantity demanded rises from 40 units to 50 units. As price
rises from ₹600 to ₹700, quantity demanded falls from 40 units to 30 units. This shows an
inverse relationship between price and quantity demanded of a commodity keeping all other
factors constant.

Market demand schedule

Market demand schedule refers to a table showing various quantities of a commodity that all the consumers taken together are willing and able to buy at different prices, during a given period of time assuming no change in other factors affecting demand.

It is the sum of demand schedules of all individual consumers of a commodity at each price.

Price (₹) Quantity demanded by A

QA (units)

Quantity demanded by B

QB (units)

Market Demand

Qm = QA + QB (units)
1 25 30 25+30 = 55
2 20 25 20+25 = 45
3 15 20 15+20 = 35
4 10 15 10+15 = 25
5 5 10 5+10= 15

Market demand curve

It is graphical representation of the market demand schedule such that each point on the curve shows the quantity of a good that all consumers taken together are willing and able to buy at a given price during a given period of time. It is a horizontal summation of individual demand curves.

In the diagram given below: At price ₹3, AB + CD = AD (15+20 =35)

Market demand curve

 

 

Market demand curve is flatter than the individual demand curves. It happens because as price changes, proportionate change in market demand is more than proportionate change in individual demand.

 

Slope of Demand Curve

Slope of a curve is defined as the change in the variable on the Y-axis divided by the change in the variable on the X-axis. So, the slope of the demand curve equals the Change in Price divided by the Change in Quantity demanded.

 

Slope of demand curve =\dpi{150} \frac{\bigtriangleup Y}{\bigtriangleup X}=\frac{\Delta p}{\Delta Q}

 

  • The demand curve is generally downward sloping showing an inverse relationship between price and quantity demanded of a commodity. So, slope is Negative.

 

  • Slope of the demand curve measures the flatness or steepness of the demand curve.

 

Movements along the demand curve (Change in quantity demanded)

It refers to a change in quantity demanded of a good caused by a change (increase or decrease) in own price of the good keeping all other factors affecting demand constant.

Two types of movements:-

a) Downward movement (Expansion of Demand )

Price (₹) Demand
20 100
15 150

Expansion of demand refers to a rise in the quantity demanded of a good due to a fall in its own price, keeping all other factors affecting demand constant.

 

Expansion/Extension of Demand

 

  • It leads to a downward movement along the same demand curve.
  • It is also known as ‘Expansion of Demand’ or ‘Increase in Quantity Demanded‘.

 

When price falls from₹20 to ₹ 15, quantity demanded rises from 100 units to 150 units , resulting in a downward movement from A to B along the same demand curve DD.

 

b) Upward movement (Contraction of Demand )

Price (₹) Demand
20 100
25 70

Contraction of demand refers to a fall in the quantity demanded of a good due to a rise in its own price, keeping all other factors affecting demand constant.

Contraction of Demand

 

Contraction of Demand

 

  • It leads to an upward movement along the same demand curve.
  • It is also known as ‘Contraction of Demand’ or ‘Decrease in Quantity Demanded’.

 

When price rises from ₹20 to ₹25, quantity demanded falls from 100 units to 70 units , resulting in an upward movement from A to B along the same demand curve DD.

Shifts of demand curve (Change in demand)

It refers to a change in demand of a good caused by a change in any of the factors affecting demand other than own price of the commodity.

 

 

Shifts of demand curve (Change in demand)

Reasons

Reasons :- 

(i) Change in price of substitute goods.
(ii) Change in price of complementary goods.
(iii) Change in income of consumers.
(iv) Change in tastes and preferences.
(v) Expectation of change in price in future.

Two types of shift

  • Rightward Shift :- Increase in demand is shown by rightward shift of demand curve from DD to DD1. Demand rises from OQ to OQ1 due to a favourable change in any of the other factors affecting demand, keeping own price of the good constant at OP. More is demanded at the same price.
  • Leftward Shift :- Decrease in demand is shown by leftward shift of demand curve from DD to DD2. Demand falls from OQ to OQ2 due to an unfavourable change in any of the other factors affecting demand, keeping own price of the good constant at OP. Less is demanded at the same price.

Movements along the demand curve Vs Shifts of the demand curve

Movements along the demand curve

(change in quantity demanded)

 

 Shifts of the demand curve

(change in demand)

It refers to a change in quantity demanded of a good caused by a change (increase or decrease) in own price of the good keeping all other factors affecting demand constant. It refers to a change in demand of a good caused by a change in any of the factors affecting demand other than own price of the commodity.

 
Types of movements :-

  • Downward movement or Expansion of demand. (due to fall in own price of the good keeping all other factors affecting demand constant.)
  • Upward movement or Contraction of demand. (due to rise in own price of the good keeping all other factors affecting demand constant.)

 

 

 

 

 

 

 

 

 

 Types of shifts :-

  • Rightward shift or Increase in demand occurs due to an increase in the price of substitute good, increase income of the consumer in case of normal good, decrease in price of complementary good, decrease in income of the consumer in case of inferior good and favourable change in tastes and preferences for the good.
  • Leftward shift or Decrease in demand occurs due to a decrease in the price of substitute good, decrease income of the consumer in case of normal good, increase in price of complementary good, increase in income of the consumer in case of inferior good and unfavourable change in tastes and preferences for the good.

 

 

Change in Quantity Demanded Vs Change in Demand

Change in Quantity Demanded Change in Demand
It refers to a change in the quantity demanded of a commodity due to a change in its own price, keeping all other factors affecting demand constant. It refers to a change in the demand of a commodity due to a change in any of the other factors affecting demand, keeping own price constant.

 
It leads to a movement along the same demand curve.

  • A movement upwards along the same demand curve is due to a rise in price of the commodity (known as Contraction in demand) keeping all other factors affecting demand constant.
  • A movement downwards is due to a fall in price of the commodity (known as Expansion in demand) keeping all other factors affecting demand constant.

 

 

 

 

 It leads to a shift of the demand curve

  • A rightward shift of the demand curve is due to favourable changes in any of the factors affecting demand other than own price.

(known as Increase in demand)

 

  • A leftward shift of the demand curve is due to unfavourable changes in any of the factors affecting demand other than own price. (known as Decrease in demand)

 

 

 
Price Quantity Price Quantity
25 50 20 50
20 70 20 70
15 100 20 100
When price rises from ₹20 to ₹ quantity demanded falls from 70 to 50

• When price rises from ₹20 to₹25, quantity demanded falls from 70 to 50 units. Less is demanded at a higher price. (Contraction of demand)
• When price falls from ₹20 to ₹15, quantity demanded rises from 70 to 100 units. More is demanded at a lesser price. (Expansion of demand)

 

 At the same price ₹20, demand rise to 100 units due to

any of the factors affecting demand than own price. More is demanded at the (Increase in demand

At the same price ₹20 to 50 units due to unfavourable changes in any of the factors affecting demand than own price. (Decrease in demand) is demanded at the same price.

Upward movement(Contraction of demand)

Downward movement (Expansion of demand)

 

 

 

 

 

 

 

 

 

 

Increase in demand(Rightward shift)

 

Decrase in demand (Leftward shift)

 

 

 

 

 

 

 

 

 

 

 
  • A movement upwards along the same demand curve is due to a rise in own price of the commodity from OP1 to OP3, keeping all other factors affecting demand constant. (Contraction in demand from OQ1 to OQ3)
  • A movement downwards is due to a fall in own price of the commodity from OP1 to OP2 keeping all other factors affecting demand constant. (Expansion in demand from OQ1 to OQ2)
  • A rightward shift of the demand curve from D to D1 is due to favourable changes in any of the other factors affecting demand keeping own price constant at OP.(Increase in demand from OQ to OQ1)
  • A leftward shift of the demand curve is due to unfavourable changes in any of the other factors affecting demand keeping own price constant at OP. (Decrease in demand from OQ to OQ2)

Contraction in Demand (Decrease in Quantity Demanded) Vs Decrease in Demand

Contraction in Demand

(Decrease in Quantity Demanded)

Decrease in Demand
It refers to a fall in quantity demanded( of a good due to an increase in own price, keeping all other factors affecting demand constant.

 

 

 

 

 

 

 

 

 

  

It refers to a fall in the demand of a commodity caused due to an unfavourable change in any of the factors affecting demand other than own price of the commodity.

For example: Due to unfavorable change in the other factors like decrease in the prices of substitutes. increase in the prices of complementary goods, decrease in income of the consumer in case of normal goods, unfavourable change in tastes and preferences of the consumer etc.

 

 
Price Quantity Price Quantity
20 100 20 100
25 70 20 70
When price rises from ₹20 to ₹25 demanded falls from 100 units to 70 units. Less is demanded at a higher price all other factors affecting demand constant.  

₹20, demand falls from 100 to an unfavourable change in the factors affecting demand other

Less is demanded at the same price.
There is an upward movement along the same demand curve.

 

When price rises from ₹20 to ₹25, quantity

demanded falls from 100 to 70 units. It is an upward movement along the same demand curve (from A to B).

 There is a leftward shift of the demand curve.

 

The demand curve shifts leftwards from DD to DD1 Demand falls from 100 units to 70 units at the same price ₹20 showing a decrease in demand.

Exception of demand

Exception of demand means those conditions on which the law of demand does not apply:-

Giffen Goods :- Giffen Goods is a concept that was introduced by Sir Robert Giffen. These goods are goods that are inferior in comparison to luxury goods. However, the unique characteristic of Giffen goods is that as its price increases, the demand also increases. And this feature is what makes it an exception to the law of demand.

Highly Essential Good ::- Finally, in case of certain highly essential items such as life- saving drugs, people buy a fixed quantity at all possible price. Heart patients will buy the same quantity of ‘Sorbitrate’ whether price is high or low. Their response to price change is almost nil.

Snob Appeal or Veblen Good :- Rich people buy such things which are more expensive to show in the society or to get more prestige. Eg:- Diamonds, precious idols etc.

This is known as ‘snob appeal’, which induces people to purchase items of conspicuous consumption. Such a commodity is also known as Veblen good (named after the economist Thorstein Veblen) whose demand rises (fails) when its price rises (falls).

The expectation of Price Change: – When the consumer is aware that the supply of goods will decrease in future, due to which the price of this commodity will increase. For this reason, demand increases even when the price rises. For example, the law of demand does not apply on the stock market.

Emergency Situation:- If a state of emergency has arisen in the country such as war and communal riots. In such a situation the law of demand does not apply. Because at such a time the shortage of goods starts to arise and the consumer starts to understand that these goods will not be available in future. In such a situation, they demand more of the goods at a higher price.

Fashion :- The law of demand does not apply even on fashion. The goods which are in fashion, they are in demand even when the price of those items is high. But the goods which are not in fashion are less demanded even when their price is low.

Necessary Goods and Services :-  Another exception to the law of demand is necessary or basic goods. People will continue to buy necessities such as medicines or basic staples such as sugar or salt even if the price increases. The prices of these products do not affect their associated demand

Ignorance: Consumers may buy more of a commodity at a higher price when they are ignorant of the prevailing prices of the commodity in the market.

Recap :-

  • Law of Demand states the inverse relationship between price and quantity demanded of a commodity, keeping all other factors affecting demand constant (ceteris paribus).
  • The demand curve is generally downward sloping showing an inverse relationship between price and quantity demanded of a commodity.
  • Movement along demand curve occurs, when the quantity demanded changes due to a change in its own price, keeping other factors affecting demand constant.
  • Shift in demand curve occurs when the demand changes due to change in any factor other than the own price of the commodity,
  • Substitute goods are those goods which can be used in place of one another for satisfaction of a particular want. For example: Tea and Coffee.
  • Complementary goods are those goods which are used together to satisfy a particular want. For example: Tea and Sugar.
  • The demand for a normal good increases (decreases) with increase (decrease) in the consumer’s income. The demand for an inferior good decreases (increases) as the income of the consumer increases (decreases).

 

 

 

 

 

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