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• Theory of Demand

What is the Theory of Demand?

Demand is defined as the quantity of a commodity that a Consumer is capable of buying and is willing to pay the given price for it at the given time. The Theory of Demand is a Law that states the relationship between the quantity Demanded of a product and its price, assuming that all the other factors affecting the Demand are constant. According to the Law of Demand Theory, the quantity Demanded of a commodity is inversely related to its price in the market. Through this article, we will try to comprehend the Theory of derived Demand, the factors affecting Demand, the Demand curve and the application of Demand Theory.

Theory of Derived Demand

We have got an idea about “what is the Theory of Demand”. So now let us try to understand the Theory of derived Demand with the help of an example: a Consumer Demands a piece of clothing, let’s say a shirt, which is a finished product that came into existence after undergoing various processes. First, the land for building the plant was acquired by the manufacturing Company and then the labour was employed by the entrepreneur using the Company’s Capital. The Demand for all these resources (factors of production) was indirectly created when the Consumer posed a Demand for the shirt. This is called the Theory of derived Demand.

Factors Affecting Demand

After having discussed the Theory of Demand economics and the Theory of derived Demand, we will now talk about the various factors affecting the quantity Demanded of a product.

Price of the Commodity: As stated in the Law of Demand Theory, the price of a commodity shows an inverse relationship with its quantity Demanded. As the price of the product falls, its Demand increases.

The Number of Consumers: It is directly related to the quantity Demanded of a commodity. The more the number of Consumers, the more is the Demand for that product.

Price of Related Goods: There are two types of related goods: Substitutes and Complementary goods. For example, for milk, the juice is a substitute whereas biscuits are complementary products. If the prices of milk fall, the Demand for juice (substitute) will increase and that for biscuits (complementary goods) will lessen.

Income: With the increment in a Consumer’s income, he will become capable of buying more of a particular commodity, and thereby, his Demand will also rise.

Consumer Expectation: If a Consumer expects that the price of a certain commodity will go up in the future, he will buy more of that product at present, which will lead to a hike in its Demand.

Tastes and Preferences: It has a direct relation with the quantity Demanded.

Solved Example

Q. Explain the Demand Curve.

Ans: We now know “what is the Theory of Demand” and the factors that determine the quantity Demanded. Let us move on to the characteristics of a Demand curve. On the x-axis, we have taken the price of the commodity, and on the y-axis, the quantity Demanded.

(Image will be uploaded soon)

The first graph here shows the movement along the same Demand curve. This downward-sloping curve is in accordance with the Law of Demand Theory as when the price falls from P1 to P2, the quantity Demanded increases from Q1 to Q2.

In this graph, we can see that there is a shift in the Demand curve from D to D1 at the same price P. For the curve D, the quantity Demanded is Q which is lesser than Q1 (for D1 curve). This right-shift in the Demand curve is due to all the factors affecting the Demand except the price of the commodity (which is responsible for movement along the curve). These are the same factors that are kept constant while explaining “what is the Theory of Demand”.

Application of Demand Theory

After having learned about “what is the Theory of Demand” and how a Demand curve looks like, we will now become familiar with the application of Demand Theory in real life. The Theory of Demand is useful in determining the force of various determinants or factors that affect the quantity Demanded. The application of Demand Theory for estimating the ups and downs in the equilibrium prices of various commodities is important for investors and entrepreneurs.

Named after Sir Robert Giffen, Giffen goods are considered inferior goods that do not obey the Law of Demand Theory. According to the Theory of Demand, the Demand for a particular commodity diminishes with an increase in its price, but for Giffen goods, it increases with the rise in price. A historical example of the Giffen goods concept is the Irish Potato Famine of the 19th century. When the price of potatoes (Giffen goods) inflated, people cut their expenses by buying fewer luxury goods like meat and bought more potatoes.

FAQs on Theory of Demand

1. How is demand different from desire and want?

A desire is a mere wish to have something which may or may not be fulfilled. A person who desires to buy a car may not necessarily have the money to purchase it. A desire backed by sufficient resources becomes a want. However, a person who wants to buy a car may not be willing to pay for it at the given time or price. A demand, as discussed under the theory of demand, is defined as the quantity of a commodity that a consumer wants, with both the ability and willingness to purchase it at the given cost and time.

2. What is meant by the law of diminishing marginal utility under the law of demand theory?

The law of diminishing marginal utility is one of the aspects of the application of demand theory. It states that as a person continues to consume a particular product, the amount of additional utility or satisfaction received by him decreases eventually. For example, if a consumer buys a certain type of drink for a while, soon he will stop getting the desired satisfaction as gained in the beginning. As a result, he will move to some other product and hence the demand for that particular kind of drink will decrease. This is what the law of diminishing marginal utility implies.

Commerce Aspirant » Economics Class 11 » Theory of Demand in Economics Class 11 Notes

Theory of Demand in Economics Class 11 Notes

Demand in economics – concept and definition.

Demand is the number of goods or commodities, which a consumer is both, willing, and able to buy, at each possible price during a given period of time.

The definition of demand highlights four essential elements of demand:-

• Quantity of the commodity – Demand is always, for a specified Quantity of the commodity
• Willingness of consumer to buy the commodity – If a consumer is not willing to buy a commodity, there is no demand for that commodity
• Price of the commodity at each given level of Quantity of the commodity – Different quantity of the same commodity, that a consumer is willing to buy , may be available at different price. Normally, larger the quantity demanded, lower is the price offered for a commodity
• Period of time – The demand is always at a given point / period of time

Demand for a commodity may be either with respect to an individual or to the entire market.

• Individual demand : – Individual demand refers to the quantity of a commodity,  that a consumer is willing and able to buy at each possible price during a given period of time. For example, if the price of a Gel Pen is Rs. 40, and the individual is ready to buy 10 pens at this price, it is said that the individual demand for GelPen is 10 units at a price of Rs. 40
• Market demand :- Market demand refers to the quantity of a commodity,  that all the consumers, together are willing and able to buy at each possible price during a given period of time.

Characteristics of demand :-

• Defined with reference to price:-

Demand for any commodity , is always given  with reference to a particular price. As the price of a commodity changes, the quantity demanded in respect of that commodity may also change . As a general rule,  demand is higher at a lower price, and it keeps reducing as the price of the commodity increases. For example, if the total demand of a Gel Pen is 10,000 units at Rs. 40,   the demand may increase to 20,000 units if the price were to reduce to Rs. 20. This would be since new customers, who earlier, could not afford the pen, would also buy it. Further, existing customers may buy more units of the Pen at this price .

• It is always expressed with respect to a period of time:-

Demand , is  expressed,  with reference to time. With the change of time (which may be an hour, a day a month or a year), even if the  price remains the same, the demand may change . For example, the demand for woollen clothes may be higher during winters, while at the same price, it may be lower / non-existent in summers.

Determinants of demand : – (Individual demand):-

Demand for a commodity increases or decreases due to a number of factors. The various factors affecting demand are :-

1. Price of the Given commodity :

Price of the commodity is the most important factor,  affecting the demand for a given commodity. Generally there exists an inverse relationship between price and quantity demanded. This implies that as the price of a commodity increase, the quantity demanded for the commodity falls .  

For example:- If the price of the given commodity (say tea) increases its quantity falls as satisfaction derived from tea will fall due to rise in its price.

The following determinants are termed as ‘other factors’ or factors ‘other than price’

2. Price of related goods

Demand for the given commodity is also affected by the change in prices of the related goods. Related goods are of two types :-

(i) Substitute goods:- Substitute goods are those goods which can be used in place of one another for satisfaction of a particular want, like tea and coffee. An increase in the price of substitute leads to an increase in the demand for given commodity and vice – versa.

For example : – If price of a substitute good (say, coffee) increases then demand for given commodity (say, tea) will rise as tea will become relatively cheaper in comparison to coffee. So, demand for a given commodity is directly affected by change in price of substitute goods.

(ii) Complementary goods:- Complementary goods are those goods which are used together to satisfy a particular want, like tea and sugar, An increase in the price of complementary good leads to a decrease in the demand for given commodity and vice – versa.

For example : – if the price of a complementary good (say, sugar) increases, then demand for given commodity (say, tea) will fall as it will be relatively costlier to use both the goods together. So, demand for a given commodity is inversely affected by change in price of complementary goods.

Example of substitute goods:-

• Tea and coffee
• Coke and Pepsi
• Pen and Pencil
• Ink pen and ball pen
• Rice and wheat
• Example of complementary goods:-
• Tea and Sugar
• Pen and ink
• Car and Petrol
• Bread and Butter
• Pen and Refill
• Brick and cement

3.   Income of the consumer:-

Demand for a commodity is also affected by income of the consumer. However, the effect of change in income on demand depends on the nature of commodity under consideration.

• If the given commodity is a normal good, then an increase in income lads to rise in its demand, while a decrease in income reduces the demand.
• If the given commodity is an inferior good, then an increase in income reduces the demand while a decrease in income leads to rise in demand.

Example :- Suppose income of a consumer increases. As a result, the consumer reduces consumption of toned milk and increases consumption of full cream milk. In this case ‘Toned milk’ is an inferior good for the consumer and ‘Full cream milk’ is a normal good.

4. Tastes and Preferences : –

Tastes and preferences of the consumer directly influence the demand for a commodity. They include changes in fashion, customs, habits etc. If a commodity is in fashion or is preferred by the consumers, then demand for such a commodity rises. On the other hand, demand for a commodity falls, if the consumers have no taste for that commodity.

5. Expectation of change in the price in future : –

If the price of a certain commodity is respected to increase in near future, then people will buy more of that commodity than what they normally buy. There exists a direct relationship between expectation of change in the prices in future and change in demand in the current period

For example:-   If the price of petrol is expected to rise in future, its present demand will increase. Change in quantity demanded us change in demand:-

• Change in quantity demanded : – Whenever demand for the given commodity changes due to change in its own price, then such change in demand is known as “ Change in Quantity Demand”. For example, if demand for Pepsi changes due to. Change in its own price, then such change in demand is known as “Change in Quantity Demanded”. For example, if demand for Pepsi changes due to change in its own price, then such change in demand for Pepsi is known as change in quantity demanded.
• Change in Demand : – Whenever demand for the given commodity changes due to factors other than price, then such change in demand is known as “Change in demand”. For example : – If demand for Pepsi changes due to change in price of Coke or due to change in income or due to a change in taste, then such change in demand for Pepsi is known as change in demand.

Determinants of Market demand:-

(1) size and composition of population :-.

Market demand for a commodity is affected by size of population in the country. Increase in population in the country. Increase in population in the country. Increase in population raises the market demand, while decrease in population reduces the market demand. Composition of population i.e. ratio of males, females, children and number of old people in the population also affects the demand for a commodity. For example :- if a market has larger proportion of women, then there will be more demand for articles of their use such as lipstick, sarees etc.

(2) Season and weather : –

The seasonal and weather conditions also affect the market demand for a commodity. For example : – during winters, demand for woolen clothes and jackets increases, whereas, market demand for raincoat and umbrellas increases during the rainy season.

(3) Distribution of Income : –

If income in the country is equitably distributed, then market demand for commodities will be more. However if income distribution is uneven i.e. people are either very rich or very poor, then market demand will remain at lower level.

Demand function :-

Demand function shows the relationship between quantity demanded for a particular commodity and the factors influencing it. It can be either with respect to one consumer (individual demand function) or to al the consumers in the market (market demand function).

Individual Demand function:-

Individual demand function refers to the functional relationship between individual demand and the factor affecting individual demand.

It is expressed as

D x  =  f (P x , Pr, Y, T, F)

D x  = Demand for commodity x

P x  = Price of the given commodity x ,

P r  = Prices of related Goods

y  = Income of the consumer

T = Tastes and Preferences

F = Expectation of change in price in future.

Market demand function :-

Market demand function refers to the functional relationship between market demand and the factors affecting market demand. Market demand function can be expressed as

D x  = Market demand of commodity x ,

P x  = Price of given commodity x ,

Pr = Prices of related goods;

y = Income of the consumers;

T = Tastes and Preferences,

F = Expectation of change in price in future;

Po = Size and composition of population;

S = Season and weather;

D = Distribution of Income.

Demand schedule :-

Demand schedule is a tabular statement showing various quantities of a commodity being demand at various levels of price, during a given period of time. It shows the relationship between price of the commodity and its quantity demanded.

A demand schedule can be determined both for individual buyers and for the entire market. So, demand schedule is of two types:-

• Individual demand schedule
• Market demand schedule

Individual demand schedule :- Individual demand schedule refers to a tabular statement showing various quantities of a commodity that a consumer is willing to buy at various levels of price, during a given period of time.

Dm = D A + D B + ……..

Dm is the market demand D A + D B + …….. are the individual demands of household A, household B and so on

Demand Curve:-

Let us assume that A and B are two consumers for commodity x in the market Table shows that market demand schedule is obtained by horizontally summing the individual demand. Market demand is obtained by adding demand of households A and B at different prices. At ₹ 5 per unit, market demand is 3 units. When price falls to ₹ 4, market demand rises to 5 units. So, market demand schedule also shows the inverse relationship between price and quantity demanded.

Demand curve is a graphical representation of demand schedule. It is the locus of all the points showing various quantities of a commodity that a consumer is willing to buy at various levels of price, during a given period of time, assuming no change in other factors.

Unit 5: Consumer’s Equilibrium and Demand

• Concept of Utility in Economics
• Measurement of Utility in Economics
• Total Utility and Marginal Utility
• Law of Diminishing Marginal Utility
• Conditions of Consumer’s Equilibrium
• Theory of Demand
• What is Demand in Economics
• Demand Characteristics
• Determinants of demand
• Determinants of Market Demand
• Demand Function In Economics
• Demand Schedule | Individual demand schedule | Market demand schedule
• Economics Class 11 Notes
• Accountancy Class 11 Notes
• Economics Class 11 MCQs

Business Studies Class 11 MCQ

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Notes on the Theory of Demand | Economics

Notes on the Theory of Demand:- 1. Meaning and Definitions of Demand 2. Notes on Demand Function 3. Factors Determining Individual Demand 4. Factors Determining Market Demand 5. Demand Schedule 6. Demand Curves 7. Law of Demand 8. Movement along a Demand Curve and Shifts in the Demand Curve 9. Kinds of Demand 10. Inter-Related Demands. 

It must be remembered that demand in Economics is always stated with reference to a particular price. Any change in price will normally bring about a change in the quantity demanded. In addition to price, demand is also used in reference to a particular period of time. For Example- demand for umbrellas will not be as high in winter as during rains. The demand for any commodity or service, therefore, must be stated with reference to the price and the relevant point of time.

Notes on Demand :

We know that people have numerous wants which vary in intensity and quality. Just desiring or wanting things is not enough to create a demand. Suppose, a mill worker desires or wants to have a car but does not have the necessary means to buy it.

This desire is ineffective and will not become a demand. Similarly, a miser may desire to have the car, has means to purchase it, but will not spend the money. His desire would also not constitute a demand. Thus, we define demand for a commodity or service as an effective desire, i.e., a desire backed by means as well as willingness to pay for it.

ADVERTISEMENTS:

The demand arises out of the following three things:

i. Desire or want of the commodity.

ii. Ability to pay,

iii. Willingness to pay.

Only when all these three things are present then the consumer presents his demand in the market.

Definitions :

“Demand for a commodity is the quantity which a consumer is willing to buy at a particular price at a particular time.”

“The demand for anything, at a given price, is the amount of it which will be bought per unit of time at that price.” -PROF. BENHAM

“By demand, we mean the quantity of a commodity that will be purchased at a particular price and not merely the desire of a thing.”-HANSEN

Notes on the Demand Function :

Demand function shows the relationship between quantity demanded for a particular commodity and the factors influencing it. It can be either with respect to one consumer or to all the consumers in the market.

A consumer’s demand for a commodity is influenced by the following factors:

1. A consumer’s demand for a commodity is influenced by the price of that commodity. Usually the higher the price, the lower will be the quantity demanded.

2. A consumer’s demand for a commodity is influenced by the size of his income. In most cases, the larger the income, the greater will be the quantity demanded.

3. A consumer’s demand for a commodity is influenced by the prices of related commodities. They may be complementary or substitutes.

4. The tastes of the consumers.

In technical language, it is said that the demand for a commodity is a function of the four variables like:

q = f(P, Y, P r , T)

Where q stands for quantity demanded, P stands for the price of the commodity in question, Y stands for the income of the consumer, P r indicates prices of the related commodities and T denotes the Tastes of the consumer and f stands for function. But in practice the three of these four variables remain constant. And hence the demand function takes the form of-

Notes in the Factors Determining Individual Demand :

Demand is not dependent on price alone. There are many other factors which affect the demand of a product.

These factors are as follows:

1. Price of the Product:

Demand for a commodity depends on its price. As price rises, for a normal good, demand falls and vice-versa. However, there are exceptions, i.e., for Giffen goods, as price rises demand also rises.

2. Income of the Consumer:

A key determinant of demand is the level of income i.e., the higher the level of income the higher the demand for a given commodity. Consumer’s income and quantity demanded are generally related positively. It means that when income of the consumer rises he wants to have more units of that commodity and when his income falls he reduces the demand.

In consumer theory, an inferior good is a good that decreases in demand when consumer income rises i.e., increase in income reduces the demand because the consumer shifts his consumption to superior goods and forgoes his existing product. Thus reducing its demand.

Cheaper cars are examples of the inferior goods. Consumers will generally prefer cheaper cars when their income is constricted. As a consumer’s income increases the demand for cheap cars decreases and demand for costly cars increases.

3. Prices of Related Goods:

Consumption choices are also influenced by the alternative options available to users in the relevant market place. Market information regarding alternative products, quality, convenience and dependability all influence choices.

The two products may be related in two ways- Firstly, as complementary goods and secondly as substitute goods.

Complementary goods are those goods which are used jointly and consumed together like tennis ball and a racket, petrol and car. The relationship between the price of a product and the quantity demanded of another is inverse. For example if the price of cars were to rise, less people would choose to buy and use cars, switching perhaps to public transport-trains. It follows that under these circumstances the demand for the complementary good petrol would also decrease.

Goods which are perceived by the consumer to be alternatives to a product are termed as substitute goods. There is direct relationship between the demand for a product and the price of its substitute. Example- scooter and a motorcycle, tea and coffee.

The increase in price of tea would decrease its quantity demanded and people would switch over to its substitute commodity coffee.

4. Consumer’s Tastes and Preferences:

Demand for a product is also affected by the tastes and preferences of the consumers. As tastes and preferences shift from one commodity to the other, demand for the first commodity reduces and that of the other rises.

5. Expectation of Future Prices:

The current demand of a product also depends on its expected price in future. If future price is expected to rise, its present demand immediately increases because the consumer has a tendency to store it at low prices for his future consumption. If, however the price of a product is expected to fall then he has a tendency to postpone its consumption and as a result the present demand would also fall.

This is often the case on Budget Day, when consumers rush to fill their petrol tanks prior to an expected increase in taxation. The reverse is also true, in that an expectation that prices are about to fall, will decrease current demand, as consumers will await for the expected price reduction.

6. Economic Conditions:

The demand for commodities also depends upon prevailing business conditions in the country. For, example- during the inflationary period, more money is in circulation and people have more purchasing power. This causes an increase in demand of various goods even at higher prices. Similarly, during deflation (depression), the demand for various goods reduces in spite of lower prices because people do not have enough money to buy.

Notes on the Factors Determining Market Demand :

Market demand for a commodity means the sum total of the demand of all individuals. Market demand depends, not only on the prices of the commodity and prices of related commodities but also on the number of factors.

1. Pattern of Income Distribution:

If National income is equitably distributed, there will be more demand and vice-versa. If income distribution moves in favour of down­trodden people, then demand for such commodities, which are used by common people would increase. On the other hand, if the major part of National income is concentrated in the hands of only some rich people, the demand for luxury goods will increase.

2. Demographic Structure:

Market demand is influenced by change in size and composition of population. Increase in population leads to more demand for all types of goods and decrease in population means less demand for them. Composition of population also affects its demand. Composition refers to the number of children, adults, males, females etc., in the population.

When the composition changes, for example, when the number of females exceeds to that of the males, then there will be more demand for goods required by women folk.

3. Government Policy:

Government policy of a country can also affect the demand for a particular commodity or commodities through taxation. Reduction in the taxes and duties will allow more persons to enter a particular market and thus raising the demand for a particular product.

4. Season and Weather:

Demands for commodities also depend upon the climate of an area and weather. In cold hilly areas woolens are demanded. During summer and rainy season demand for umbrellas may rise. In winter ice is not so much demanded.

5. State of Business:

The levels of demand in a market for different goods depend upon the business condition of the country. If the country is passing through boom, the trade is active and brisk. The demand for all commodities tends to rise. But in the days of depression, when trade is dull and slow, demand tends to fall.

Demand Schedule :

The demand schedule in economics is a table of quantity demanded of a good at different price levels. Given the price level, it is easy to determine the expected quantity demanded. This demand schedule can be graphed as a continuous demand curve on a chart where the Y-axis represents price and the X-axis represents the quantity.

According to PROF. ALFRED MARSHALL, “Demand schedule is a list of prices and quantities”. In other words, a tabular statement of price-quantity relationship between two variables is known as the demand schedule.

The demand schedule in the table represents different quantities of commodities that are purchased at different prices during a certain specified period (it can be a day or a week or a month).

The demand schedule can be classified into two categories:

1. Individual demand schedule;

2. Market demand schedule.

1. Individual Demand Schedule:

It represents the demand of an individual’ for a commodity at different prices at a particular time period. The adjoining table 7.1 shows a demand schedule for oranges on 7th July, 2009.

Katrina Ávila Munichiello is an experienced editor, writer, fact-checker, and proofreader with more than fourteen years of experience working with print and online publications.

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The law of demand is one of the most fundamental concepts in economics. Alongside the law of supply , it explains how market economies allocate resources and determine the prices of goods and services.

The law of demand states that the quantity purchased varies inversely with price. In other words, the higher the price, the lower the quantity demanded. This occurs because of diminishing marginal utility . That is, consumers use the first units of an economic good they purchase to serve their most urgent needs first, then they use each additional unit of the good to serve successively lower-valued ends.

Key Takeaways

• The law of demand is a fundamental principle of economics that states that at a higher price, consumers will demand a lower quantity of a good.
• Demand is derived from the law of diminishing marginal utility, the fact that consumers use economic goods to satisfy their most urgent needs first.
• A market demand curve expresses the sum of quantity demanded at each price across all consumers in the market.
• Changes in price can be reflected in movement along a demand curve, but by themselves, they don't increase or decrease demand.
• The shape and magnitude of demand shifts in response to changes in consumer preferences, incomes, or related economic goods, not usually to changes in price.

Economics involves the study of how people use limited means to satisfy unlimited wants. The law of demand focuses on those unlimited wants. Naturally, people prioritize more urgent wants and needs over less urgent ones in their economic behavior, and this carries over into how people choose among the limited means available to them.

For any economic good, the first unit of that good that a consumer gets their hands on will tend to be used to satisfy the most urgent need the consumer has that that good can satisfy.

For example, consider a castaway on a desert island who obtains a six-pack of bottled fresh water that washes up onshore. The first bottle will be used to satisfy the castaway’s most urgently felt need, which is most likely drinking water to avoid dying of thirst.

The second bottle might be used for bathing to stave off disease, an urgent but less immediate need. The third bottle could be used for a less urgent need, such as boiling some fish to have a hot meal, and on down to the last bottle, which the castaway uses for a relatively low priority, such as watering a small potted plant to feel less alone on the island.

Because each additional bottle of water is used for a successively less highly valued want or need by our castaway, we can say that the castaway values each additional bottle less than the one before.

The more units of a good that consumers buy, the less they are willing to pay in terms of price.

Similarly, when consumers purchase goods on the market, each additional unit of any given good or service that they buy will be put to a less valued use than the one before, so we can say that they value each additional unit less and less. Because they value each additional unit of the good less , they aren't willing to pay as much for it.

By adding up all the units of a good that consumers are willing to buy at any given price, we can describe a market demand curve , which is always sloping downward, like the one shown in the chart below. Each point on the curve (A, B, C) reflects the quantity demanded (Q) at a given price (P). At point A, for example, the quantity demanded is low (Q1) and the price is high (P1). At higher prices, consumers demand less of the good, and at lower prices, they demand more.

In economic thinking, it is important to understand the difference between the phenomenon of demand and the quantity demanded. In the chart above, the term “demand” refers to the light blue line plotted through A, B, and C.

It expresses the relationship between the urgency of consumer wants and the number of units of the economic good at hand. A change in demand means a shift of the position or shape of this curve; it reflects a change in the underlying pattern of consumer wants and needs vis-à-vis the means available to satisfy them.

On the other hand, the term “quantity demanded” refers to a point along the horizontal axis. Changes in the quantity demanded strictly reflect changes in the price, without implying any change in the pattern of consumer preferences.

Changes in quantity demanded just mean movement along the demand curve itself because of a change in price. These two ideas are often conflated, but this is a common error—rising (or falling) prices don't decrease (or increase) demand; they change the quantity demanded .

So what does change demand? The shape and position of the demand curve can be affected by several factors. Rising incomes tend to increase demand for normal economic goods, as people are willing to spend more. The availability of close substitute products that compete with a given economic good will tend to reduce demand for that good because they can satisfy the same kinds of consumer wants and needs.

Conversely, the availability of closely complementary goods will tend to increase demand for an economic good because the use of two goods together can be even more valuable to consumers than using them separately, like peanut butter and jelly.

Other factors such as future expectations, changes in background environmental conditions, or changes in the actual or perceived quality of a good can change the demand curve because they alter the pattern of consumer preferences for how the good can be used and how urgently it is needed.

Supply is the total amount of a specific good or service that is available to consumers at a certain price point. As the supply of a product fluctuates, so does the demand, which directly affects the price of the product.

The law of supply, then, is a microeconomic law stating that, all other factors being equal, as the price of a good or service rises, the quantity that suppliers offer will rise in turn (and vice versa). When demand exceeds the available supply, the price of a product typically will rise. Conversely, should the supply of an item increase while the demand remains the same, the price will go down.

What is a Simple Explanation of the Law of Demand?

The law of demand tells us that if more people want to buy something, given a limited supply, the price of that thing will be bid higher. Likewise, the higher the price of a good, the lower the quantity that will be purchased by consumers.

Why Is the Law of Demand Important?

Together with the law of supply, the law of demand helps us understand why things are priced at the level that they are, and to identify opportunities to buy what are perceived to be underpriced (or sell overpriced) products, assets, or securities . For instance, a firm may boost production in response to rising prices that have been spurred by a surge in demand.

Can the Law of Demand Be Broken?

Yes. In certain cases, an increase in demand doesn't affect prices in ways predicted by the law of demand. For instance, so-called Veblen goods are things for which demand increases as their price rises, as they are perceived as status symbols. Similarly, demand for Giffen goods (which, in contrast to Veblen goods, aren't luxury items) rises when the price goes up and falls when the price falls. Examples of Giffen goods can include bread, rice, and wheat. These tend to be common necessities and essential items with few good substitutes at the same price levels.

The law of demand posits that the price of an item and the quantity demanded have an inverse relationship. Essentially, it tells us that people will buy more of something when its price falls and vice versa.  When graphed, the law of demand appears as a line sloping downward.

This law is a fundamental principle of economics. It helps to set prices, understand why things are priced as they are, and identify items that may be overpriced or underpriced.

University of Southern Philippines Foundation. " Law of Demand ," Page 1.

Econlib. " Demand ."

University of Pittsburgh. " Supply and Demand ," Page 1.

University of Pittsburgh. " Supply and Demand ," Page 3.

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Hicks Revised Theory of Demand

Hicks’ first theory of demand was presented in his book ‘Value and Capital.’ He revised his theory and published his book . A Revision of Demand Theory’ in 1956. Samuelson’s revealed preference theory, the growing importance of econometric and  other allied developments led to this revision. In .revision of the demand theory. Hie em i the econometric approach to the theory of the Salient points in Hicks.

Even in his new theory. His confirmed his belief in the ordinal approach to the utility theory and rejected the concept of utility hypo if independent utilities.

But it is curious that Hicks. who was largely responsible for popularizing indifference curves in economic analysis, almost gave them up in his revision of demand theory. Among the disadvantages of indifference curves he mentions that: (a) this technique call not include more than two commodities; and (b) it is based on the assumption of continuity which is generally not to be found in economic field. The new method that he adopted was, in his view, more effective in clarifying the nature of preference hypothesis itself.

Hicks starts by taking up an ideal consumer who is supposed to he influenced by current prices and incomes alone in his behavior. Hicks adopts preference hypothesis for explaining the behavior of an ideal consumer, Preference hypothesis assumes behavior according to scale of preference.

Hicks is able to deduce all the major propose  of theory of consumer demand from the logic of weak ordering and the theory of direct consistency test based on it. He derives the law of demand or the downward sloping demand curve and for this purpose he adopts the same technique as was adopted in the case of indifference curve, viz., splitting the price effect into its two components; income effect and substitution feel. He deduces the- substitution effect from the consistency the .’ and the income effect is based upon  empirical evidence . The substitution effect is separated by means of (0 the method of compensating variation and by the method of cost diffidence. (This has been explained in the previous chapter revealed preference).

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• Prof. Jonathan Gruber

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Session Overview

Keywords : Elasticity; revenue; empirical economics; demand elasticity; supply elasticity.

Session Activities

Before watching the lecture video, read the course textbook for an introduction to the material covered in this session:

• [R&T] Chapter 5, “Elasticity: A Measure of Response.”
• [ Perloff ] Chapter 3, “Applying the Supply-and-Demand Model.” (optional)

Lecture Videos

• Download video
• Download transcript
• Graphs and Figures (PDF)

Further Study

A vertical demand curve means that if the supply curve shifts, only the price changes; there is no change in quantity demanded.

When a good has a perfect substitute (for example, hamburgers at different fast food chains), then if there is a price increase at one store, consumers will simply switch to purchasing from another store. This results in a perfectly elastic demand curve. A good that has no substitutes will have perfectly inelastic demand. The existence of complementary goods and the nature of the supply curve do not affect the elasticity of demand.

Being in the hospital is correlated with being ill, because primarily ill patients are admitted to the hospital, but this is not the cause of the illness. The primary challenge of empirical economics is to distinguish correlation and causation.

The elasticity of demand does not change when price changes, and we have not discussed any change on the supply side. If revenue is declining that means that consumers are shifting away from this firms good (now that is newly expensive) and purchasing goods made by other firms, not vice versa.

Any shock to the supply of a good caused by weather or government policy will shift the supply curve, and this will allow us to use the resulting changes in price and quantity sold to estimate the elasticity of demand.

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