Meaning of demand

Desire backed up by ability and willingness to pay

Quantity of a commodity that a consumer wants to purchase at a certain price during a certain time

period

Mere desire is not sufficient for demand. The consumer must have ability to pay and willingness to pay for
fulfillment of desire. For demand all of desire, ability and willingness to pay are required. In absence of one or
more of them demand doesnt arise. To express demand the following things must be specified

Quantity

Price

Time duration

Ability to pay

Desire

Willingness to pay

Example

If a beggar has the desire of a big apartment then that is not demand ( no ability to pay)

A man with salary of Rs 25000 a month, wants to buy vegetable of Rs. 35 for a week then that is called

demand ( all price, time, ability, willingness and desire)

Differences between DEMAND and DESIRE

Serial no

Demand

Desire

It is the desire or want backed up by ability and

willingness to pay.

It is simply human want

It is limited

It is unlimited

It is always for the things available in the market

It may be for intangible and imaginary things too

It has a market value

It may or may not have market value

Ability and willingness to pay is mandatory.

Ability and willingness to pay are not mandatory.

It is expressed with reference to price and time

duration

It is not expressed with time and price duration.

Law of Demand
The law of demand states that the demand is inversely related to price other things remaining
constant (ceteris paribus). It means if price raises demand contracts or decreases and if price
diminishes demand expands or increases. The law of demand operates only if factors
determining demand other than prices are constant. It means prices of complementary goods,
substitutes, income, taste of consumer, population, advertisement etc should be constant.
Law of demand can be explained with the help of demand schedule and demand curve as
following
Let the initial price Rs 10 per kg and demand be 400 kg per week. If the prices raise to Rs 15
the consumer s reduce their demand. In above table demand is at 300 kg/week when price is
Rs 15. If the price further raises to Rs 20 the demand further
decreases to 200kg/week. It shows that demand changes
Price( in
Demand(per
inversely to the change in price when other things remain
Rs)
week)
constant. If we represent the table in figure then we obtain a
downwardly sloped demand curve as shown below
10
400
15

300

20

200

In the above figure the demand curve is downwardly sloped. It shows that demand decreases
with rise in price and increases with fall in price.

2. Income and taste of

consumers are constant. 3.Size of population is constant. 4. There is no change in
taxes and advertisement, money supply and government expenditure.
Assumptions:

1.Price of related goods is constant.

Limitation/ exception of law of demand

1.

Goods of prestige: Demand for goods of prestige like gold, demand may not decrease
even there is rise in price. They are purchased and consumed because of their heavy
prices.

2.

Goods of hobbies: The law of demand does not hold in case of goods of hobbies like
collection, ticket collection, and collection of historical and archaeological materials and so
on. The things are collected even paying more and more amount

3.

Goods of addiction: in case of goods and addiction like alcohol, tobacco, drugs etc
the demand does not decrease even there is increase in price. Instead of operation of law
of demand consumers purchase more units even if there is rise in price.

4.

Giffen goods: Demand for giffen goods increase even there is rise in price and vice
versa. The law of demand isnt applicable to them. The goods which are both basic and
inferior are geffen goods.

5.

Goods of tradition: The goods consumed according to tradition, culture and religion
have demand usually not inversely related to price. For example, during dashain the
Nepalese people purchase more goods to celebrate the festival even if prices are
increased.

6.

Future expected price: If the consumers expect fall in price in near future, they do
not purchase more right now even if there is fall in price currently and vice versa.

7.

Future availability: If the consumers have fear of shortage of commodity in near

future, they purchase more and keep the stock even if price has been higher. But if they
expect greater availability of goods in the near future, they purchase less quantity even
price has been decreased.

8.

Change in taste and preference: If the consumers have the fear of the goods out of
fashion in near future, they demand less even if prices are decreased.

9.

Irrationality: Law of demand does not operate in case of irrational consumers. The
unscrupulous consumers spend the money not according to satisfaction from the goods.

Why does demand law operate?

Why does demand curve slopes downward?
Why does demand vary inversely with price?
1.

Diminishing marginal utility: According to Gossen, of a consumer goes on

consuming more units of same commodity without time gap, marginal utility diminishes. It
means 2nd unit gives less utility or satisfaction than 1st unit, 3rd gives less than 2nd and
so on. Therefore, the consumer demands more only if prices are reduced.

2.

Real income effect: if price falls real income increases even if the money is constant.
Therefore, consumers demand more. If the price rises, real income falls even if money
income is constant. Therefore, consumers demand less.

3.

Substitution effect: if a commodity becomes cheaper the commodity is substituted

for other substituting goods. If the commodity becomes expensive, it is substituted by
other substitutes.

4.

No. of uses: If the price falls, the commodity is used for least important purposes too.
Thats why demand increases. If price rises, the commodity is used only for important
purposes. Thats why demand decreases.

5.

No. of consumers: If price falls, the consumers who were unable to purchase the
commodity because of high price, will also be able to consume the commodity. Thats why
demand increases and vice versa.

TYPES OF DEMAND
Price demand: Demand primarily dependent upon price is called price demand. This

demand is sensitive or responsive to the change in price. In case of normal goods, demand
increases with fall in price and vice versa. But in case of giffen goods demand increases even
there is rise in price.

1.
Cross demand: Demand primarily dependent upon prices of related goods is called
cross demand. The complementary goods and substitutes are called related goods. In case
of complementary goods like pen and ink demand for good is inversely related to the
prices of other goods but the case in substituting goods are just opposite. Demand for
substituting goods is directly related to prices.

2.

Income demand: Demand primarily dependent upon income is called income

demand. This demand is sensitive or responsive to the change in income. In case of
normal goods, demand increases with rise in income and vice versa. But in case of giffen
goods demand decreases when there is increase income.

3.

Direct demand: Demand for goods and services made by final consumers to satisfy
their wants or needs is called direct demand. For example guest of hotels make the
demand for food.
4.
Derived demand: Demand for goods and services made according to direct demand
is called derived demand. For example demand made by hotels for vegetable, groceries is
called derived demand.
5.
Joint demand: Demand made for two or more goods and services to satisfy single
need or want is called joint demand. For example, tea sugar are demand together to
satisfy a single need. The complementary goods are jointly demanded
6.
Composite demand: Demand for a single commodity made in order to use for
different purposes is called composite demand. In this case, commodity is one but the
number of uses is multiple. For example, the electricity is used for lighting, heating,
transportation for the use of different electrical device.
Determinants of demand
1.

Price: Demand is inversely related to price. If price increases, demand decreases and
vice versa. But in case of Giffen goods (goods that are inferior and basic like low quality
rice and bread for Nepalese), demand is directly related to price.

2.

Price of complementary goods: Demand is inversely related to price of

complementary goods. The goods which are consumed together to fulfill a single need like
brick and cement, pen and ink are called complementary goods. If price of
complementary goods rises demand for the commodity decreases and vice versa.

3.

Price of substitutes: Demand is directly related to price of substitutes. The goods

among which we choose one to fulfill our need are called substitutes. They are alternative
of and competitive to each other like Coke and Pepsi. If prices of substitutes rise, demand
increases and vice versa.

4.

Income: Demand for normal goods is directly related to income of consumer. If income
increases, demand too increases and vice versa. But demand for inferior goods is
inversely related to income.

5.

Population: Demand is directly related to population and number of consumer. If

population increases demand too increases and vice versa.

6.

Taste and preferences: If taste and preference of consumer change in favor of goods,
demand increases. If it changes against the goods, demand decreases.

7.

Tax rates: If government imposes more taxes, the demand decreases and vice versa.

8.

Advertisement: Demand is directly related to expenditure and advertisement

expenditure. More advertisement of a good brings more demand.

9.

Interest rates: Demand is inversely related to interest rate. If interest rate raises
people save more, deposit in banks or lend to earn interest. Due to this reason demand
decreases and vice versa.

10.

Nature of commodity: The demand depends upon the nature of commodities too.
The demand for basic goods is relatively inelastic. But demand for luxurious goods usually
is elastic.

Factors determining the elasticity of Demand:

1.

Degree of necessity:
If goods are very essential then such goods demand is inelastic. If they are not
very necessary for human life then demand for goods is elastic.

2.

3.

4.

5.

6.

7.

8.

9.

Proportion of customers income spending on the commodity:

If people spend small amount form the income upon a commodity then demand of
such commodity is inelastic but if they spend huge part of their income for the
commodity then its demand is elastic.
Existence of substitute good:
If there is available of close substitute goods then in this case demand is elastic
but if there is no close substitute of commodity then demand is elastic.
Habit:
If goods are related to the taste and preference then demand of such goods is
inelastic and vice-versa.
Several use of commodity:
If goods are of multipurpose then its demand is elastic but if it is use for single
purpose its demand is inelastic.
Postponement:
If consumers can post pond the need of goods then its demand is elastic but if they
cant be post-pond then its demand is inelastic.
Range of Price:
If the commodities are of low price range and high price, demand for these goods
is inelastic but if they are of middle price range then its demand is elastic.
Time Period:
If time period is shorter, there is no chance to change choice then demand for
those goods is inelastic but is time period is long then demand is elastic.
Income level:
The commodity which is purchased by low and high level income earner then
demand is inelastic but in the case of middle income earner demand is elastic.

Elasticity of Demand:
1. Price elasticity of demand (ep)
It refers the percentage change in quality demand due to the certain
percentage change in price when other things remaining the same.
Mathematically it is explained as:

Where,
ed = elasticity of demand
Q = change in quantity demand
P = change in price commodity
P = initial price
Q = initial quantity demand

2. Income Elasticity of demand

It refers to the percentage change in quantity demand due to the certain
percentage change in income of consumers when other things remaining the
same.
Mathematically, it can be expressed as:

Where,
ey = income elastic of demand
Q = change in quantity demand (i.e. Q2 Q1)
y = change in income
y = initial income
Q = initial quantity demand

3. Cross elasticity of demand

It refers the percentage change in quantity demand of one commodity i.e. x due
to certain change in price of another commodity i.e. y when other things
remains the same.
Mathematically,

where,

exy = cross elasticity of demand

Qx = change in quantity demand for x commodity
Py = change in price of y commodity
Py = initial price of y commodity
Qx = initial quantity demand for x commodity

MEASUREMENT OF PRICE ELASTICITY OF DEMAND

A) Perfectly elastic demand
Due to slight fall or rise in the price of commodity, if quality demand increases or
decreases infinitely then it is known as perfectly elastic demand. We can explain it on
the following figure:

On the above figure, in initial stage price in OP then quantity is Q. When price slightly
increases then demand decreases from Q to Qo. Ehen price decreases then demand
increases rapidly from Q to Q1. This shows infinity change.

B) Perfectly inelastic demand

If there is no change in quantity demand due to the certain percentage change in
price is called perfectly inelastic demand.

In the above fig, when price is OP quantity demand is OQ. When price decreases to
Po then demand is constant or same. When the price increases to P1 then the demand
is again same. This shows when increases or decreases quantity demand remains
same.
C) Relatively elastic demand
If the percentage change in quantity demand is greater than the percentage change
in price is known as relatively elastic demand. For example 10% change in demand
due to 5% change in demand; we can explain it by following figure

On the above figure, when price is OP then quantity demand for that commodity is
OQ. When prices become P1 by increasing by 5% then quantity demand decreases
from Q to Q1 by 10% and when price decreases by 5% to Po then quantity demand
increases from Q to Qo by 10%.

D) Relatively inelastic demand

If the percentage change in quality demand is percentage change in price is known as
relatively inelastic demand. For example 5% change in quantity demand due to 10%
change in price. In the case of normal good, demand is relatively inequality. We can
explain by the given figure.

On the above figure, when price is OP then quantity demand is OQ. When price
decreases by 10% to Po then quantity demand is OQ1. It is increased by 5%.

E) Unitary elastic demand

If percentage change in price commodity is equal to percentage change in quantity
demand then it is known as unitary elastic demand. We can explain it by the given
figure.

In the above figure, when price is OP then demand is OQ. When the price decreases
by 10% price becomes Po. At that time quantity demand increases by 10% and
demand becomes Qo.

Income elasticity of Demand:

a) Income elasticity of demand greater than one
If the percentage change in quantity demand is greater than the percentage change
in income is known as income elasticity of demand greater than one.
For example, change in demand by 10% due to change in income by 5%.
We can explain it by the help of given figure:

On the above figure x and y axis measures quantity demand and income respectively.
DD is demand curve. In initial stage, income and demand is OI and OQ. When income
is increased from I to I1 by 5% then demand is increased from Q to Q1 by 10%. This
case is known is income elasticity of demand greater than one.
b) Income elasticity of demand less than one
If the percentage change in quantity demand is less than the percentage change in
income is known as income elasticity of demand less than one.For example, change in
demand by 5% due to change in income by 10%.

On the above figure, initial income is OI

and quantity demand is OQ. When
income increases from I to I1 by 10%
then demand increases from Q to Q1 by
5%. This is known as elasticity of