Demand & Law of Demand (ISC XI

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### **DEMAND & LAW OF DEMAND** ### 1. MEANING OF DEMAND - **DEFINITION:** Quantity of a commodity consumer is **WILLING & ABLE** to buy at a specific **PRICE** during a specific **PERIOD**. - Not just desire; requires purchasing power. ### 2. TYPES OF DEMAND - **INDIVIDUAL DEMAND:** Single consumer's demand. - **MARKET DEMAND:** Sum of all individual demands. - **DERIVED DEMAND:** For a factor of production (e.g., steel for cars). - **JOINT DEMAND:** For complementary goods (e.g., car & petrol). - **COMPOSITE DEMAND:** For a good with multiple uses (e.g., milk). ### 3. DETERMINANTS OF DEMAND (FACTORS AFFECTING DEMAND) - **P_x (PRICE OF THE COMMODITY):** - Inverse relationship. - **P_r (PRICE OF RELATED GOODS):** - **SUBSTITUTES:** Direct relationship (P_coffee $\uparrow$ → D_tea $\uparrow$). - **COMPLEMENTS:** Inverse relationship (P_petrol $\uparrow$ → D_cars $\downarrow$). - **Y (INCOME OF CONSUMER):** - **NORMAL GOODS:** Direct relationship (Y $\uparrow$ → D $\uparrow$). - **INFERIOR GOODS:** Inverse relationship (Y $\uparrow$ → D $\downarrow$). - **T (TASTES & PREFERENCES):** Favorable T $\uparrow$ → D $\uparrow$. - **E (EXPECTATIONS):** Future P $\uparrow$ → Current D $\uparrow$. - **N (NUMBER OF BUYERS):** N $\uparrow$ → Market D $\uparrow$. ### 4. LAW OF DEMAND - **STATEMENT:** CETERIS PARIBUS (other things constant), as **PRICE $\uparrow$**, **QUANTITY DEMANDED $\downarrow$**, and vice versa. - **ASSUMPTIONS:** All other determinants (Y, P_r, T, E, etc.) remain constant. - **DEMAND SCHEDULE:** Table showing P & Q_D. - Individual: For one consumer. - Market: Sum of individual schedules. - **DEMAND CURVE:** Graphical representation of Law of Demand. - **SLOPE:** DOWNWARD SLOPING from left to right. - **WHY DOWNWARD SLOPING?** - **LAW OF DIMINISHING MARGINAL UTILITY:** P $\downarrow$ because MU $\downarrow$. - **INCOME EFFECT:** P $\downarrow$ → Real Income $\uparrow$ → Purchasing Power $\uparrow$ → D $\uparrow$. - **SUBSTITUTION EFFECT:** P_x $\downarrow$ → X becomes relatively cheaper → D_x $\uparrow$. - Entry of new buyers. - Multiple uses of commodity. - **DIAGRAM EXPLANATION:** As price moves from P1 to P2 (P $\downarrow$), quantity demanded moves from Q1 to Q2 (Q_D $\uparrow$). ### 5. MOVEMENT ALONG vs. SHIFT OF DEMAND CURVE - **MOVEMENT ALONG (CHANGE IN QUANTITY DEMANDED):** - Cause: Change in **OWN PRICE** of the commodity. - **EXTENSION:** P $\downarrow$ → Q_D $\uparrow$ (Downward movement). - **CONTRACTION:** P $\uparrow$ → Q_D $\downarrow$ (Upward movement). - **SHIFT OF DEMAND CURVE (CHANGE IN DEMAND):** - Cause: Change in **ANY NON-PRICE DETERMINANT** (Y, P_r, T, E, N). - **INCREASE IN DEMAND:** Non-price factor favorable → D_curve shifts **RIGHT**. (More Q_D at same P). - **DECREASE IN DEMAND:** Non-price factor unfavorable → D_curve shifts **LEFT**. (Less Q_D at same P). ### 6. EXCEPTIONS TO LAW OF DEMAND - Price $\uparrow$ → Quantity Demanded $\uparrow$ (Upward sloping demand curve) - **GIFFEN GOODS:** Extreme inferior goods (e.g., coarse grains for very poor). Income effect > Substitution effect. - **VEBLEN GOODS (STATUS SYMBOLS/OSTENTATION):** Higher price enhances prestige (e.g., diamonds, luxury cars). - **SPECULATION/EXPECTATIONS:** Expectation of future price rise → Buy more now. - **NECESSITIES:** Essential goods may not follow law strictly (e.g., medicines). - **IRRATIONAL BEHAVIOR/IGNORANCE:** Buying high-priced goods due to perceived quality. ### QUICK REVISION BOX - **KEY POINTS:** 1. Demand = Desire + Ability + Willingness (at P & T). 2. Law of Demand: Inverse P-Q_D relationship (Ceteris Paribus). 3. Demand Curve: Downward sloping due to Income/Substitution Effects. 4. Movement: Due to P_x (Extension/Contraction). 5. Shift: Due to Non-P_x factors (Increase/Decrease). 6. Exceptions: Giffen, Veblen, Speculation. - **COMMON MISTAKES:** 1. Confusing "change in quantity demanded" with "change in demand". 2. Not stating "Ceteris Paribus" for Law of Demand.