Economics Project: Demand
1. Introduction
Economics is the study of how individuals, businesses, and governments allocate scarce
resources to meet their needs and desires. One of the cornerstones of economic theory is
demand — the quantity of goods or services consumers are willing and able to purchase at
various prices during a given period.
Demand influences production decisions, pricing strategies, and government policy-making.
Understanding demand helps predict consumer behavior, market trends, and economic
cycles.
This project explores the concept of demand, its types, factors influencing it, and the
fundamental law of demand. Along with theoretical explanations, this project provides
demand schedules, curves, and graphical illustrations.
2. Meaning of Demand
Demand is a crucial economic concept that measures consumer willingness and ability to
buy a product.
Willingness refers to the desire to purchase a good or service.
Ability means having sufficient purchasing power to buy it.
Without both, demand does not exist. For example, many people may want a luxury car, but
only those who can afford it are counted as demand.
Formal Definitions:
Marshall (1890): 'Demand for a thing means those quantities of it which will be bought per
unit of time at given prices.'
Paul Samuelson: 'Demand is a schedule showing the amounts of a good or service that
consumers are willing to purchase at different prices over a period.'
Distinction:
- Demand vs. Desire: Desire alone is insufficient; demand requires ability to pay.
- Demand vs. Quantity Demanded: Quantity demanded is the amount demanded at a specific
price; demand refers to the entire schedule or relationship between price and quantity.
Example: If the price of mangoes is Rs 50 per kg, and a consumer is willing and able to buy 2
kg, the quantity demanded is 2 kg at Rs 50. If the consumer cannot afford it, even if they
want it, demand doesn’t exist.
3. Types of Demand
Demand varies in nature based on context, usage, and consumers involved.
3.1 Individual Demand: The quantity demanded by a single consumer for a good at various
prices.
Example: John wants to buy 3 smartphones at $500 each.
3.2 Market Demand: Sum total of individual demands for a product in a market at various
prices.
Example: All consumers in the city together buy 10,000 smartphones at $500.
3.3 Composite Demand: Goods demanded for multiple uses. Demand depends on how much
is needed for each purpose.
Example: Sugar is used for cooking and making sweets.
3.4 Derived Demand: Demand for a good that arises from demand for another good.
Example: Demand for bricks increases because of rising demand for new houses.
3.5 Joint Demand: Demand for goods that are used together.
Example: Demand for printers increases the demand for printer cartridges.
3.6 Autonomous Demand: Demand which arises for goods for direct consumption,
independent of other goods.
Example: Food grains.
4. Determinants (Factors) Affecting Demand
Demand depends on various internal and external factors. Let’s explore the eleven key
determinants in detail:
4.1 Price of the Good: Most important determinant. Demand and price have an inverse
relationship. As price rises, quantity demanded falls, and vice versa.
Example: If the price of tea increases from Rs 20 to Rs 40 per cup, customers buy less tea.
4.2 Income of Consumers: For normal goods, demand rises with income. For inferior goods,
demand falls with income increase.
Example: When income rises, people buy more branded clothes instead of cheap
alternatives.
4.3 Prices of Related Goods: Substitutes are goods that can replace each other.
Example: If the price of coffee increases, demand for tea may increase as a substitute.
Complements are goods used together.
Example: If petrol price rises, demand for cars may fall.
4.4 Consumer Tastes and Preferences: Fashion trends, health concerns, or cultural shifts
affect demand.
Example: Increase in demand for electric vehicles due to environmental awareness.
4.5 Consumer Expectations: Expectations of future prices or incomes influence current
demand.
Example: If prices expected to rise, consumers may buy more now.
4.6 Population: Larger population generally leads to higher demand.
4.7 Season and Weather: Seasonal products have fluctuating demand.
Example: Demand for umbrellas rises in rainy seasons.
4.8 Government Policies: Taxes increase prices, reducing demand. Subsidies lower prices,
increasing demand. Regulations can restrict or promote demand.
4.9 Advertising and Marketing: Effective advertising can shift consumer preferences.
Increases demand by informing and persuading consumers.
4.10 Credit Facilities: Availability of easy credit allows consumers to buy more, increasing
demand.
Example: EMI schemes for electronics.
4.11 Price of Complementary and Substitute Goods: Prices of related goods directly
influence demand for the product.
5. Law of Demand
The law of demand is a fundamental economic principle describing the inverse relationship
between price and quantity demanded.
When the price of a good falls, consumers buy more of it; when the price rises, they buy less,
assuming other factors are constant.
5.1 Demand Schedule
Price (Rs) Quantity Demanded (Units)
20 10
15 20
10 30
5 50
2 70
5.2 Demand Curve
The demand curve is a graphical representation of the demand schedule. It plots price on
the vertical (Y) axis and quantity demanded on the horizontal (X) axis.
It slopes downward from left to right, showing the inverse relationship between price and
quantity demanded.
6. Assumptions of the Law of Demand
The law of demand holds true under these assumptions:
1. Ceteris Paribus: All other factors except price remain unchanged.
2. Constant Consumer Income: Income remains fixed.
3. No Change in Tastes: Consumer preferences stay the same.
4. Prices of Related Goods Fixed: Prices of substitutes and complements do not change.
5. Rational Consumer Behavior: Consumers aim to maximize satisfaction.
Diagram: The demand curve illustrating that only price affects quantity demanded.
7. Reasons for the Downward Slope of the Demand Curve
7.1 Income Effect: Price decrease increases real income. Consumers can buy more with the
same income.
7.2 Substitution Effect: When price falls, the good is cheaper relative to substitutes.
Consumers switch from substitutes to this good.
7.3 Diminishing Marginal Utility: Each additional unit provides less satisfaction. Consumers
only buy more if price falls.
7.4 Law of Equi-Marginal Utility: Consumers distribute income to maximize utility. They
shift spending toward goods offering more marginal utility per rupee.
8. Exceptions to the Law of Demand
8.1 Giffen Goods: Inferior goods with no close substitutes. Price rise causes demand
increase due to strong income effect.
Example: Staple foods in poor economies.
8.2 Veblen Goods (Snob Effect): Higher price raises status symbol value. Demand increases
with price rise.
Example: Luxury watches, designer handbags.
8.3 Speculative Demand: Buyers expect further price increases. Demand increases even if
price rises.
Example: Real estate during a market boom.
8.4 Necessities: Goods like medicines where demand is less sensitive to price changes.
Example: Life-saving drugs.
8.5 Ignorance or Delay in Adjustment: Consumers may not immediately respond to price
changes.
Example: Waiting time for substitutes.
9. Conclusion
Demand is a fundamental concept in economics that explains consumer behavior in the
market.
Understanding demand and its determinants helps businesses and policymakers make
informed decisions.
The law of demand highlights the inverse relationship between price and quantity
demanded but has notable exceptions.
By studying demand, we gain insights into how markets function and how resources are
allocated efficiently.
10. Bibliography
1. Samuelson, Paul A. and Nordhaus, William D. 'Economics'. McGraw Hill Education.
2. Mankiw, N. Gregory. 'Principles of Economics'. Cengage Learning.
3. Marshall, Alfred. 'Principles of Economics'. Macmillan and Co.
4. Case, Karl E. and Fair, Ray C. 'Principles of Economics'. Pearson.
5. Online Resources: Investopedia, Economicshelp.org, Khan Academy.
