NIOS Economics • Module 6

Lesson 15: Demand

Lesson 15 Summary • Consumer's Behaviour

Theory of Demand: Meaning, Determinants, Law & Curves

Master the fundamental economic concept of demand. Understand the vital difference between Desire, Want, and Demand, analyze individual vs. market demand determinants, explore the Law of Demand with its assumptions and exceptions, and differentiate between movement along the demand curve and shifts in demand.

Section 1

1. Meaning & Core Elements of Demand

Foundational Concepts
1. Desire

Merely a wish or craving to have a commodity, regardless of whether one has the money or if the commodity is available. (e.g., A poor person wishing for a luxury sports car).

2. Want

A desire backed by the ability to pay (purchasing power) and willingness to pay. Every desire is not a want, but a desire becomes a want when backed by money.

3. Demand

The quantity of a commodity that a consumer is willing and able to buy at a given price during a given period of time.

3 Essential Elements of Demand

A complete statement of demand MUST contain all three elements:

(i) Quantity of Commodity (ii) Price of Commodity (iii) Time Period (Day/Week/Month)

Example: "Akshay bought 2 kg apples last week when the price was ₹60 per kg" is a complete demand statement.

Individual Demand

Quantity of a commodity that an individual single buyer is willing to buy at a given price during a given time period.

Market Demand

Total aggregate quantity of a commodity that all buyers in the market taken together are willing to buy at a given price over a given period of time.

Section 2

2. Determinants / Factors Affecting Demand

A. Determinants of Individual Demand

1. Own Price of Commodity (P)

Inverse relationship between price and quantity demanded (ceteris paribus). When price rises, demand falls; when price falls, demand rises.

2. Price of Related Goods (Pr)
  • Substitute Goods (Tea & Coffee): Used in place of one another. Price of Coffee ↑ → Demand for Tea ↑ (Direct Relationship).
  • Complementary Goods (Car & Petrol): Used together. Price of Petrol ↑ → Demand for Cars ↓ (Inverse Relationship).
3. Income of the Buyer (Y)
  • Normal Goods (Full cream milk, Basmati rice): Income ↑ → Demand ↑ (Direct Relationship).
  • Inferior Goods (Toned milk, Coarse rice): Income ↑ → Demand ↓ (Inverse Relationship).
4. Tastes and Preferences (T)

Favorable changes in fashion, customs, or habits increase demand for a commodity; unfavorable changes reduce demand.

B. Additional Determinants of Market Demand

(i) Population & Demographics

Larger population increases market demand. Composition (age/gender ratio) dictates demand for specific goods (e.g., toys for children vs. medicines for elderly).

(ii) Income & Wealth Distribution

Distribution favoring the rich increases demand for luxury items; distribution favoring the poor increases demand for essential necessities.

(iii) Season & Weather

Demand shifts with season (e.g., Woolens in winter, Ice creams/Cold drinks in summer, Umbrellas in rainy season).

Section 3

3. Law of Demand: Statement, Reasons & Exceptions

Statement of Law of Demand

"Other things remaining the same (ceteris paribus), the quantity demanded of a commodity is inversely related to its price."

Price ↑ → Quantity Demanded ↓  |  Price ↓ → Quantity Demanded ↑
4 Core Assumptions ("Other Things Remaining Same"):
  1. Prices of substitute goods remain constant.
  2. Prices of complementary goods remain constant.
  3. Income of the buyer remains unchanged.
  4. Tastes, preferences, and fashion remain constant.

5 Reasons Why Demand Curve Slopes Downward

1. Law of Diminishing Marginal Utility

As consumption increases, utility from additional units declines. Consumers pay less for additional units.

2. Income Effect

Price fall increases real purchasing power, enabling consumers to buy more with same money income.

3. Substitution Effect

When price falls, good becomes relatively cheaper than substitutes, attracting buyers away from substitutes.

4. Change in Number of Buyers

Lower price allows new buyers (who previously could not afford it) to enter the market.

5. Diverse Uses of a Commodity

Goods with multiple uses (e.g. Milk) are restricted to core uses when expensive, but put to varied uses when price falls.

4 Key Exceptions to the Law of Demand (Upward Sloping)

1. Giffen Goods

Special inferior goods (e.g. Jowar, Bajra) where negative income effect outweighs substitution effect. Price ↑ → Demand ↑.

2. Status Symbol Goods

Luxury items (e.g. Diamonds, gold jewelry). Higher price enhances prestige and status value.

3. Necessities of Life

Essential goods (e.g. Medicines, salt, wheat) must be bought in required quantity regardless of price.

4. Expected Future Scarcity

During wars/famines, buyers hoard goods even at rising prices due to fear of upcoming scarcity.

Section 4

4. Movement Along vs. Shift in Demand Curve

Movement Along Demand Curve

Change in Q. Demanded

Occurs strictly due to a change in own price of the commodity, while all other factors remain constant.

Expansion of Demand (Increase in Q. Demanded): Price falls → Quantity demanded rises. Downward movement along same curve.
Contraction of Demand (Decrease in Q. Demanded): Price rises → Quantity demanded falls. Upward movement along same curve.

Shift in Demand Curve

Change in Demand

Occurs due to changes in factors other than price (income, substitute price, tastes) while own price remains constant.

Increase in Demand: More quantity demanded at same price. Entire demand curve shifts RIGHTWARD.
Decrease in Demand: Less quantity demanded at same price. Entire demand curve shifts LEFTWARD.