What is demand?
Demand is defined as want or willingness of consumers to buy
goods and services.
In economics willingness to buy goods and services should be accompanied by the ability to buy (purchasing
power) and is referred to as effective demand.
Law of demand
The law of demand is an economic law that states that
Consumers buy more of a good when its price decreases and less
when its price increases, ceteris paribus.
It states that when price increases, the amount demanded will fall and when prices fall, the amount demanded
will rise.
Rationale of the law of demand
There are two reasons for a fall in demand when the prices increase.
Income effect: People feel poorer. As the price of a good rises the purchasing power of people to buy that good
will fall. This is known as income effect.
Substitution effect: Some people might shift to cheaper alternatives/substitutes once the price of a good rise,
thus leading to a fall in demand for that good.
,Straight line (linear) demand curve
A straight line demand curve will have a different elasticity at each point on it.
The price elasticity of demand can also be measured at any point on the demand curve.
If the demand curve is linear (straight line), it has a unitary elasticity at the midpoint. The total revenue is
maximum at this point. Any point above the midpoint has elasticity greater than 1, (Ed > 1).
Here, price reduction leads to an increase in the total revenue (expenditure). Below the midpoint elasticity is less
than 1. (Ed < 1). Price reduction leads to reduction in the total revenue of the firm. Now the question arises, why
does a straight line demand curve have different elasticity at each point? The value of PED falls as price falls.
The reason is that low priced products have a more inelastic demand than high priced products, because
consumers are not that price sensitive when the product is inexpensive, Similarly the value of PED is higher
when the prices increase because consumers are more sensitive to price change when the good is expensive. A
mathematical explanation can be given as follows. As we seen in diagram below
Factors affecting demand
Change in people’s income: More the people earn the more they will spend and thus the demand will rise. A
fall in income will see a fall in demand.
Changes in population: An increase in population will result in a rise in demand and vice versa.
Change in fashion and taste: Commodities or which the fashion is out are less in demand as compared to
commodities which are in fashion. In the same way, change in taste of people affects the demand of a
commodity.
, Changes in Income Tax: An increase in income tax will see a fall in demand as people will have less money left
in their pockets to spend whereas a decrease in income tax will result in increase of demand for products and
services because people now have more disposable income.
Change in prices of Substitute goods: Substitute goods or services are those which can replace the want of
another good or service. For example margarine is a substitute for butter. Thus a rise in butter prices will see a
rise in demand for margarine and vice versa.
Change in price of Complementary goods: Complementary goods or services are demanded along with other
goods and services or jointly demanded with other goods or services. Demand for cars is affected the change in
price of petrol. Same way, demand for DVD players will rise if the prices of DVDs’ fall.
Advertising: A successful advertising campaign may affect the demand for a product or service.
Climate: Changes in climate affects the demand for certain goods and services.
Interest rates: A fall in Interest rate will see a rise in demand for goods and services.
Movement along the demand Curve
Extension of demand
Extension of demand is the increase in demand due to the fall in price, all other factors remaining constant.
Contraction of demand
Contraction of demand is the fall in demand due to the rise in price, all other factors remaining constant.
Demand is defined as want or willingness of consumers to buy
goods and services.
In economics willingness to buy goods and services should be accompanied by the ability to buy (purchasing
power) and is referred to as effective demand.
Law of demand
The law of demand is an economic law that states that
Consumers buy more of a good when its price decreases and less
when its price increases, ceteris paribus.
It states that when price increases, the amount demanded will fall and when prices fall, the amount demanded
will rise.
Rationale of the law of demand
There are two reasons for a fall in demand when the prices increase.
Income effect: People feel poorer. As the price of a good rises the purchasing power of people to buy that good
will fall. This is known as income effect.
Substitution effect: Some people might shift to cheaper alternatives/substitutes once the price of a good rise,
thus leading to a fall in demand for that good.
,Straight line (linear) demand curve
A straight line demand curve will have a different elasticity at each point on it.
The price elasticity of demand can also be measured at any point on the demand curve.
If the demand curve is linear (straight line), it has a unitary elasticity at the midpoint. The total revenue is
maximum at this point. Any point above the midpoint has elasticity greater than 1, (Ed > 1).
Here, price reduction leads to an increase in the total revenue (expenditure). Below the midpoint elasticity is less
than 1. (Ed < 1). Price reduction leads to reduction in the total revenue of the firm. Now the question arises, why
does a straight line demand curve have different elasticity at each point? The value of PED falls as price falls.
The reason is that low priced products have a more inelastic demand than high priced products, because
consumers are not that price sensitive when the product is inexpensive, Similarly the value of PED is higher
when the prices increase because consumers are more sensitive to price change when the good is expensive. A
mathematical explanation can be given as follows. As we seen in diagram below
Factors affecting demand
Change in people’s income: More the people earn the more they will spend and thus the demand will rise. A
fall in income will see a fall in demand.
Changes in population: An increase in population will result in a rise in demand and vice versa.
Change in fashion and taste: Commodities or which the fashion is out are less in demand as compared to
commodities which are in fashion. In the same way, change in taste of people affects the demand of a
commodity.
, Changes in Income Tax: An increase in income tax will see a fall in demand as people will have less money left
in their pockets to spend whereas a decrease in income tax will result in increase of demand for products and
services because people now have more disposable income.
Change in prices of Substitute goods: Substitute goods or services are those which can replace the want of
another good or service. For example margarine is a substitute for butter. Thus a rise in butter prices will see a
rise in demand for margarine and vice versa.
Change in price of Complementary goods: Complementary goods or services are demanded along with other
goods and services or jointly demanded with other goods or services. Demand for cars is affected the change in
price of petrol. Same way, demand for DVD players will rise if the prices of DVDs’ fall.
Advertising: A successful advertising campaign may affect the demand for a product or service.
Climate: Changes in climate affects the demand for certain goods and services.
Interest rates: A fall in Interest rate will see a rise in demand for goods and services.
Movement along the demand Curve
Extension of demand
Extension of demand is the increase in demand due to the fall in price, all other factors remaining constant.
Contraction of demand
Contraction of demand is the fall in demand due to the rise in price, all other factors remaining constant.
