Theory of Demand

What is Demand?

Demand is not simply a desire or a wish. Two conditions must be satisfied simultaneously for demand to exist:

• Willingness: The consumer must have the desire or intention to purchase the commodity.
• Ability (Purchasing Power): The consumer must have adequate money to actually buy it.

Demand is Always Related to:

• A specific price — demand is always stated at a particular price level
• A specific time period — demand is always per day / per month / per year
• A specific commodity — demand is always for a particular good or service

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Individual Demand vs Market Demand

Basis	Individual Demand	Market Demand
Definition	Quantity of a commodity that a single consumer is willing and able to buy at each possible price during a given period	Quantity of a commodity that all consumers in the market are willing and able to buy at each possible price during a given period
Scope	One consumer only	Sum of all individual demands in the market
Calculation	Individual data	Market Demand = Σ (All Individual Demands)
Curve	Steeper / relatively less flat	Flatter / wider (horizontal stretch)
Determinants	Price, income, related goods prices, taste, future expectations	All individual factors + season/weather, population, distribution of income

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Determinants of Demand 8-Mark Question

The factors that influence (increase or decrease) the demand for a commodity are called Determinants of Demand. These are the factors that cause demand to change.

Determinants of Individual Demand

1. Price of the Given Commodity (Own Price)

• Price increases → Demand decreases (commodity becomes expensive, satisfaction per rupee falls)
• Price decreases → Demand increases (commodity becomes affordable, more consumers can buy)
• Relationship: Inverse / Negative

2. Price of Related Goods

Related goods are of two types — Substitute Goods and Complementary Goods. The price of these related goods affects the demand for the given commodity.

Type of Related Good	Definition	Effect on Demand	Relationship	Example
Substitute Good	Goods that can be used in place of each other; they satisfy the same want	Price of substitute ↑ → Demand for given good ↑ Price of substitute ↓ → Demand for given good ↓	Direct / Positive	Tea & Coffee; Gel pen & Ball pen; Pepsi & Coke
Complementary Good	Goods that are used together; one is incomplete without the other	Price of complement ↑ → Demand for given good ↓ Price of complement ↓ → Demand for given good ↑	Inverse / Negative	Car & Petrol; Camera & Battery; Pen & Ink; Bread & Butter

3. Income of the Consumer

The effect of income on demand depends on the type of good being considered. There are two types of goods from this perspective:

Type of Good	Definition	Income ↑ → Demand	Income ↓ → Demand	Relationship	Example
Normal Good	A good for which demand increases as income increases (perceived as better quality)	↑ Increases	↓ Decreases	Direct / Positive	Full cream milk, branded clothes, restaurant food
Inferior Good	A good for which demand decreases as income increases (consumers switch to better alternatives)	↓ Decreases	↑ Increases	Inverse / Negative	Toned milk, coarse grain, second-hand goods, local brands

4. Taste and Preferences of the Consumer

• Taste/preference in favour of a good → Demand increases (Direct relationship)
• Taste/preference against a good → Demand decreases
• When something becomes a habit, fashion, or cultural preference — demand for it rises
• Example: Maggi noodles becoming popular → demand rises; falling out of favour → demand falls

5. Future Expectations of Change in Price

Future Expectation	Consumer Behaviour	Effect on Today's Demand
Price expected to RISE in future	Buy more now before it gets expensive	Today's demand increases
Price expected to FALL in future	Wait and buy later when it will be cheaper	Today's demand decreases

Additional Determinants of Market Demand

The following factors affect Market Demand in addition to the five individual demand determinants above:

Factor	Effect on Market Demand
Season and Weather	Seasonal goods see rising demand in their season (umbrellas in monsoon, woolens in winter) and falling demand off-season. Affects the entire market simultaneously.
Size and Composition of Population	Larger population → Higher market demand. Smaller population → Lower market demand. Age/gender composition also matters (e.g. young population → more demand for education, technology).
Distribution of Income	Equal (equitable) income distribution → More people have purchasing power → Higher market demand. Unequal distribution → Only the wealthy demand → Lower overall market demand for common goods.

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Substitute Goods vs Complementary Goods Exam Favourite

Basis	Substitute Goods	Complementary Goods
Definition	Goods which can be used in place of one another to satisfy the same want	Goods which must be used together — one cannot be used without the other
Relationship with Demand	Price of substitute ↑ → Demand for my good ↑ (Direct)	Price of complement ↑ → Demand for my good ↓ (Inverse)
Cross Price Elasticity	Positive (>0)	Negative (<0)
Examples	Tea–Coffee, Pepsi–Coke, Gel pen–Ballpoint pen, Bus–Train travel	Car–Petrol, Camera–Battery, Pen–Ink, Printer–Ink cartridge, Bread–Butter
MCQ Identifier	"Can be used in place of" / "instead of"	"Cannot be used without each other" / "used together"

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Normal Goods vs Inferior Goods Important

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Change in Quantity Demanded vs Change in Demand May 2025 — Key Topic

Basis	Change in Quantity Demanded	Change in Demand
Cause	Change in the price of the given commodity	Change in any factor other than price (income, related goods, taste, season, etc.)
Price	Price changes	Price remains constant
Demand Curve	Consumer moves along the same demand curve	The entire demand curve shifts (left or right)
Graphical Term	Movement along the demand curve	Shift of the demand curve
Types	Expansion (downward movement) or Contraction (upward movement)	Increase in demand (rightward shift) or Decrease in demand (leftward shift)

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Demand Function

Individual Demand Function

Shows the relationship between individual demand and all factors affecting individual demand.

Market Demand Function

Shows the relationship between market demand and all factors affecting it — includes three additional factors beyond individual demand.

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Demand Schedule Exam Favourite

Demand can be presented in three ways: Textual (written definition), Tabular (demand schedule), and Graphical (demand curve). The demand schedule is the tabular (table) presentation.

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Demand Curve Diagram Question

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Slope of the Demand Curve

• A steep demand curve → Slope value is large (price changes a lot for small quantity change)
• A flat demand curve → Slope value is small (price changes very little for large quantity change)
• Individual demand curve is steeper; Market demand curve is flatter

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Law of Demand Most Important

Assumptions (Ceteris Paribus Conditions)

For the Law of Demand to operate, all factors other than the commodity's own price must remain constant:

• Price of substitute goods remains constant
• Price of complementary goods remains constant
• Income of the consumer remains unchanged
• Taste and preferences of the consumer remain unchanged
• Consumer has no expectation of change in price in the future

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Reasons for the Law of Demand 8-Mark — Must Know

1. Law of Diminishing Marginal Utility (Law of DMU)

• Marginal = Additional/Extra | Utility = Satisfaction | Diminishing = Decreasing
• Example: First Gulab Jamun → High satisfaction. Second → Less satisfaction. Tenth → Almost no satisfaction (or discomfort).
• As satisfaction per unit falls, the consumer is not willing to pay the same price for additional units.
• Therefore: To induce consumers to buy more units, price must be reduced → Inverse relationship between price and quantity demanded.
• Demand depends on satisfaction. Lower satisfaction from additional units means consumer will only buy more if price drops.

2. Substitution Effect

• Example: Tea price falls → Tea becomes cheaper than coffee → Coffee drinkers switch to tea → Tea demand increases.
• The good becomes relatively more attractive compared to its substitutes.
• New consumers who were previously buying the substitute now shift to the given commodity.
• Result: Price ↓ → Substitution effect → Demand ↑

3. Income Effect (Purchasing Power Effect / Real Income Effect)

• Example: Water bottle costs ₹500. Consumer has ₹2000 → Can buy 4 bottles. Price falls to ₹400 → Same ₹2000 now buys 5 bottles. Real income increased.
• Real income = Purchasing power. It increases when price falls, even if money income stays the same.
• Higher real income → Consumer can afford more units → Demand increases.
• Result: Price ↓ → Real income ↑ (purchasing power ↑) → Demand ↑

4. New/Additional Customers

• When price is high → Only wealthy consumers can afford it → Fewer buyers.
• When price falls → More consumers find it within their budget → New customers enter the market.
• Old customers continue buying + New customers join → Overall market demand rises significantly.
• Result: Price ↓ → More affordable → Additional customers → Demand ↑

5. Different Uses (Multiple Uses of a Commodity)

• Example: Milk has multiple uses — drinking, making tea, curd, paneer, ghee, butter, ice cream, sweets.
• Milk price is high → Only used for essential drinking/tea (most important use).
• Milk price falls → Also used to make paneer at home, ghee, butter, sweets → Demand increases significantly.
• Similarly: Electricity has multiple uses — lighting, heating, cooling, entertainment, industry.
• Result: Price ↓ → More uses activated → Demand ↑

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Exceptions to the Law of Demand June 2024 Q — "Two Exceptions"

In most cases, the Law of Demand holds — price rises, demand falls. However, there are certain special situations where the law does NOT apply. These are called exceptions to the Law of Demand.

#	Exception	Explanation	Example
1	Giffen Goods	Special type of inferior goods. When price rises, consumers spend even more on them (because they are necessities for the poor and price rise reduces real income leaving no money for normal goods). Demand rises with price. Paradox of Giffen goods.	Staple food items for the very poor (coarse grain, bajra). Identified by economist Robert Giffen.
2	Status Symbol / Prestige / Veblen Goods (Goods of Ostentation)	Expensive luxury goods are bought because of their high price — the price is part of the status signal. Higher price → more desirable → demand increases instead of falling. These are called Veblen Goods.	Gold, diamonds, luxury cars (Rolls-Royce, Lamborghini), branded luxury bags (Louis Vuitton, Gucci), antique paintings, Nike Jordan sneakers.
3	Fear of Shortage	When consumers expect a shortage of a commodity in the near future (due to war, pandemic, lockdown, natural disaster), they buy more even as prices rise — the fear of not getting it later drives demand up despite high prices.	Essential goods during COVID-19 lockdown (sanitisers, masks, rice, flour), fuel before anticipated shortage.
4	Necessities of Life	Goods that are absolutely essential for survival or daily functioning — even if price rises, quantity demanded does not fall significantly. These are inelastic necessities.	Life-saving medicines, insulin for diabetic patients, essential food items, electricity.
5	Fashion-Related / Trendy Goods	Goods that are currently in fashion or trend are demanded at high prices. Consumers buy more because they want to keep up with the trend, regardless of price.	Trending shoes, seasonal fashion items, viral products on social media, latest smartphone models.
6	Ignorance of Consumer	When a consumer does not know the actual market price of a commodity, they may buy more even at a high price out of ignorance. They are unaware that the price charged is above the market rate.	Tourists paying inflated prices, people buying in unfamiliar markets without price knowledge, premium packaging making ordinary goods seem worth more.

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Movement Along the Demand Curve May 2025 Diagram Q

Movement is of two types:

Expansion of Demand (Downward Movement)

• Price falls → Quantity demanded rises → Consumer moves downward along the same demand curve (from A to B)
• Curve does NOT shift — movement is on the same curve
• Also called: Extension / Downward movement / Increase in Quantity Demanded

Contraction of Demand (Upward Movement)

• Price rises → Quantity demanded falls → Consumer moves upward along the same demand curve (from B to A)
• Curve does NOT shift — movement is on the same curve
• Also called: Upward movement / Decrease in Quantity Demanded

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Shift of the Demand Curve Most Tested Diagram

Rightward Shift — Increase in Demand

• Reasons: Income increases (for normal goods) / Price of substitute rises / Price of complement falls / Taste improves / Favourable future expectation / Population increases / Season comes
• At the same price, more quantity is now demanded → Curve moves to the right

Leftward Shift — Decrease in Demand

• Reasons: Income decreases (for normal goods) / Price of substitute falls / Price of complement rises / Taste deteriorates / Unfavourable future expectation / Out of season
• At the same price, less quantity is now demanded → Curve moves to the left

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Movement vs Shift — Combined Diagram 8-Mark Must Draw

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Movement vs Shift — Full Comparison May 2025 — Diagram Q

Basis	Movement Along Demand Curve	Shift of Demand Curve
Also Called	Change in Quantity Demanded	Change in Demand
Cause	Change in price of the given commodity	Change in any factor other than price
Price	Price changes (↑ or ↓)	Price remains constant
Effect on Curve	Consumer moves along the same demand curve (no new curve)	Entire demand curve shifts to a new position
Direction	Upward (contraction) or Downward (expansion)	Rightward (increase) or Leftward (decrease)
Types	Expansion: Price↓ → QD↑ (downward movement) Contraction: Price↑ → QD↓ (upward movement)	Increase: Demand↑ at same price (rightward shift) Decrease: Demand↓ at same price (leftward shift)
Factors Causing	Only the price of the commodity itself	Income, related goods prices, taste, season, population, distribution of income, future expectations

Notes compiled from lecture transcripts (Parts 1–4) · Aligned with June 2024 & May 2025 examination papers · Theory of Demand · Microeconomics