In the previous post, we learned how utility, wealth and production play a role in production. Now let’s take a look at one of the most important concepts in economics, Demand. It explains why consumers buy what they buy, how much they are willing to pay, and how the market responds to price changes. This lesson covers the meaning of demand, its determinants, the law of demand, types of demand, and how changes in demand work.
What is Demand?
Demand = Desire + Ability to pay + Willingness to pay
- A mere desire is not demand in economics
- Example: Wanting a car but having no money to buy it is not demand
Demand Function: Dn = f [Pn, Ps, Pc, Y, T]
| Symbol | Meaning |
|---|---|
| Dn | Demand for commodity n |
| Pn | Price of commodity n |
| Ps | Price of substitute goods |
| Pc | Price of complementary goods |
| Y | Income of the consumer |
| T | Taste and preference |
Determinants of Demand
| Determinant | Effect on Demand |
|---|---|
| Price of the good | Price rises → demand falls (inverse) |
| Price of substitutes | Substitute price rises → demand for good rises (direct) |
| Price of complements | Complement price rises → demand for good falls (inverse) |
| Consumer income | Income rises → demand rises for normal goods |
| Taste and preference | Favourable change → demand rises |
| Population | Population rises → demand rises |
| Climate | Hot climate → more cold drinks demanded |
Law of Demand
When all other things remain constant, if the price of a good rises, demand falls. If price falls, demand rises.
- Price and quantity demanded have an inverse relationship
- Demand curve slopes downward from left to right
Why does the demand curve slope downward?
| Reason | Explanation |
|---|---|
| Law of DMU | As more is consumed MU falls, so consumers pay less |
| Substitution effect | When price rises, consumers switch to cheaper substitutes |
| Income effect | When price falls, real income rises so consumers buy more |
| New buyers | Lower price attracts new buyers into the market |
| Old buyers | Existing buyers purchase more at a lower price |
Exceptions to the Law of Demand
In these cases the demand curve slopes upward — more is demanded at a higher price:
| Exception | Explanation |
|---|---|
| Giffen Paradox | Necessary goods (e.g. bread) — poor consumers buy more when price rises; observed by Sir Robert Giffen |
| Speculation | Consumers buy more expecting prices to rise further |
| Conspicuous goods | Status goods like luxury cars and diamonds — higher price signals prestige |
| Share market | People buy more shares when prices are rising |
| Bandwagon effect | Consumers follow social trends regardless of price |
| Veblen effect | Consumers assume higher price = better quality |
Types of Demand
1. Price Demand
- Relationship between price of a good and its quantity demanded
- Inverse relationship → curve slopes downward
- Dx = f [Px]
2. Income Demand
- Relationship between consumer income and quantity demanded
- Dx = f [Y]
| Good Type | Income rises | Curve direction |
|---|---|---|
| Normal / Superior goods | Demand rises | Upward slope |
| Inferior goods | Demand falls | Downward slope |
3. Cross Demand
- Relationship between price of one good and demand for another
- Dx = f [Py]
| Good Type | Relationship | Curve direction |
|---|---|---|
| Substitute goods (e.g. tea & coffee) | Direct — price of one rises, demand for other rises | Upward slope |
| Complementary goods (e.g. car & petrol) | Inverse — price of one rises, demand for other falls | Downward slope |
Change in Demand vs Change in Quantity Demanded
This is a very commonly tested MCQ topic:
| Change in Quantity Demanded | Change in Demand | |
|---|---|---|
| Cause | Change in price only | Change in any other determinant (income, taste, etc.) |
| Also called | Extension / Contraction | Increase / Decrease |
| On the graph | Movement along the same curve | Shift to a new curve |
| Price falls → | Extension of demand | — |
| Price rises → | Contraction of demand | — |
| Other factors improve → | — | Increase → curve shifts right |
| Other factors worsen → | — | Decrease → curve shifts left |
Demand Schedule
A demand schedule shows the quantities demanded at various price levels.
- Individual Demand Schedule → one consumer
- Market Demand Schedule → all consumers added together (horizontal summation)
Example — Market Demand Schedule:
| Price | Consumer A | Consumer B | Consumer C | Market Demand |
|---|---|---|---|---|
| 10 | 100 | 150 | 50 | 300 |
| 8 | 125 | 200 | 60 | 385 |
| 6 | 175 | 250 | 80 | 505 |
| 4 | 250 | 300 | 110 | 660 |
| 2 | 350 | 400 | 150 | 900 |
Key Concepts to Remember
- Demand = desire + purchasing power + willingness to pay
- Law of demand = inverse relationship between price and quantity demanded
- Demand curve slopes downward — except in Giffen goods, Veblen effect, speculation, etc.
- Change in price → movement along the curve (extension/contraction)
- Change in other factors → shift of the curve (increase/decrease)
- Substitute goods → direct relationship in cross demand
- Complementary goods → inverse relationship in cross demand
- Inferior goods → demand falls as income rises
Note to Students: These notes are designed for quick revision and MCQ preparation. For detailed explanation with examples, watch our YouTube video lessons. Use these notes alongside practice questions and the full PDF for complete exam preparation.
Practice MCQs for Lesson 1.3 – Part 1
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