Khandelwal Vaish Girls Institute of Technology

Subject/Discipline: Economics
Paper: Eco-51T-101: Principles of Microeconomics
Instructor: Ganesh Kumawat, Asst. Professor

Unit 1
Theory of Demand: Law of demand; determinants of demand; shifts of demand versus movements
along a demand curve; market demand.
Theory of Demand
Demand for a commodity is defined as the quantities of that commodity which a consumer is willing
to buy at various prices during a particular period of time.
Quantity demanded refers to the particular quantity which buyers are willing and able to buy at
particular price during a given period of time.
The demand for a commodity is consumer’s desire to have it for which he is willing and able to pay.
A consumer demands a packet of biscuit in a day at price of 10 rupees and willing to pay 10 rupees.
Desire is a wishful thinking. Because consumer don’t have enough money to purchase it. If consumer
have enough money but don’t want to spend it then desire will become want.
A consumer’s desire converted into demand when it satisfies five elements as:
 Desire for a thing
 Money to satisfy the desire
 Willingness to pay
 Have time to purchase
 Knowledge of price and quantity demanded
The main features of demand for a commodity are:
 Demand depends upon utility of the commodity. A consumer is rational and demands only
those commodities which provide utility.
 Demand always means effective demand i.e., demand for a commodity or the desire to own
a commodity should always be backed by purchasing power and willingness to spend.
 Demand is a flow concept, i.e., so much per unit of time.
 Demand means demand for final consumer goods.
 Demand is a desired quantity. It shows consumer’s wish or need to buy the commodity.
Demand Function
Demand function shows the functional relationship between demand for a commodity and its
determinants. The demand function for a commodity describes the relationship between the quantity
demanded of it and the factors that influence it. Individual’s demand for a commodity depends on its
own price, his income, prices of related commodities (which may be either substitutes or
complements), his tastes and preferences, and advertising expenditure made by the producers for the
commodity.
 Law of Demand
This law of demand expresses the functional relationship between price and quantity demanded.
According to the law of demand, other things being equal, if the price of a commodity falls, the
quantity demanded of it will rise, and if the price of the commodity rises, its quantity demanded will
decline. Thus, according to the law of demand, there is inverse relationship between price and
quantity demanded, other things remaining the same.

Ceteris paribus means other things will remain constant.

Assumptions of the law of demand

The law is valid only when the following assumptions hold:
 The price of the related goods remains the same.
 The income of the consumers remains unchanged.
 Tastes and preferences of the consumers remain the same.
 All the units of the goods are homogeneous.
 Commodity should be a normal good.
Demand Schedule and Demand Curve
Demand schedule is the tabular presentation of the law of demand or relationship of price and
demanded quantity. It is a tabular presentation showing the different quantities of a good that buyers
of the good are willing to buy at different prices during a given period of time.
The graphical representation of the demand function is called a demand curve.
It should be noted that a demand schedule or a demand curve does not tell us what the price is; it only
tells us how much quantity of the good would be purchased by the consumer at a various possible
prices.

The demand curve, d, slopes downward to the right or is negatively sloped. This law of downward
sloping demand has been empirically tested and verified. The independent variable (price) is
measured along the y-axis and dependent variable (quantity) is measured along the x-axis. The
demand curve shows the quantity demanded by the consumers at each price.
It is important to note here that behind this demand curve or price-demand relationship always lie the
tastes and preferences of the consumer, his income, the prices of substitutes and complementary
goods, all of which are assumed to be constant in drawing a demand curve.
Reasons for the Law of Demand: Why does Demand Curve Slope Downward?
 Law of Diminishing Marginal Utility: This law was formulated by Marshall and it states that
as the consumer has more and more of a good its marginal utility to him goes on declining. A
consumer is not interested in buying more units of the same commodity at the same price. Instead,
he is ready to pay a price equal to his marginal utility and marginal utility goes on diminishing.
In other words, consumer is willing to pay a lesser price for more units of a good. This implies
that demand curve is downward sloping.
 Income Effect: When the price of a commodity falls the consumer can buy more quantity of the
commodity with his given income. Or, if he chooses to buy the same amount of quantity as before,
some money will be left with him because he has to spend less on the commodity due to its lower
price. In other words, as a result of fall in the price of a commodity, consumer’s real income or
purchasing power increases. This increase in real income induces the consumer to buy more of
that commodity. This is called income effect of the change in price of the commodity. This is one
reason why a consumer buys more of a commodity when its price falls.
 Substitution Effect: When price of a commodity falls, it becomes relatively cheaper than other
commodities. This induces the consumer to substitute the commodity whose price has fallen for
other commodities which have now become relatively dearer. As a result of this substitution
effect, the quantity demanded of the commodity, whose price has fallen, rises. This substitution
effect is more important than the income effect. Marshall explained the downward-sloping
demand curve with the aid of this substitution effect alone, since he ignored the income effect of
the price change. Hicks and Allen who put forward an alternative theory of demand called as
indifference curve analysis of consumer’s behaviour explain this downward-sloping demand
curve with the help of both income and substitution effects.
 New Consumers Creating Demand: As price of a commodity falls, new consumer class
appears, who can now afford the commodity. Thus, the total demand for the commodity
increases, i.e., with fall in price, quantity demanded rises.
Exceptions to the Law of Demand
 Goods having Prestige Value: Veblen Effect. One exception to the law of demand is associated
with the name of the economist, Thorstein Veblen who propounded the doctrine of conspicuous
consumption. According to Veblen, some consumers measure the utility of a commodity entirely
by its price i.e., for them, the greater the price of a commodity, the greater its utility. For example,
diamonds are considered as prestige good in the society and for the upper strata of the society
the higher the price of diamonds, the higher the prestige value of them and therefore the greater
utility or desirability of them. In this case, some consumers will buy less of the diamonds at a
lower price because with the fall in price its prestige value goes down. On the other hand, when
price of diamonds goes up, their prestige value goes up and therefore their utility or desirability
increases. As a result, at a higher price the quantity demanded of diamonds by a consumer will
rise. This is called Veblen effect. Besides diamonds, other goods such as mink coats, luxury cars
have prestige value and Veblen effect works in their case too.
 Giffen Goods. Another exception to the law of demand was pointed out by Sir Robert Giffen
who observed that when price of bread increased, the low-paid British workers in the early 19th
century purchased more bread and not less of it and this is contrary to the law of demand
described above. The reason given for this is that these British workers consumed a diet of mainly
bread and when the price of bread went up they were compelled to spend more on given quantity
of bread. Therefore, they could not afford to purchase as much meat as before. Thus, they
substituted even bread for meat in order to maintain their intake of food. After the name of Robert
Giffen, such goods in whose case there is a direct price-demand relationship are called Giffen
goods. It is important to note that with the rise in the price of a Giffen good, its quantity demand
increases and with the fall in its price its quantity demanded decreases, the demand curve will
slope upward to the right and not downward.