Theory of Demand Class 11 for Commerce Students

Demand :

It refers to the quantity of a commodity that the consumer is able and willing to buy at each possible price during a given period of time, other things being equal.
There are four elements for a commodity –

1. Desire for a commodity
2. Money to fulfill that desire
3. Readiness to spend money and
4. Period of time

Law of Demand :

The law of demand states that, other things being equal, the demand for a goods rises with a decrease in price and falls with an increase an price. The term other things being equal implies that income of the consumer, his tastes and preferences and prices of other related goods remain constant. Thus price and this requirement of a commodity has inverse relation.

Assumptions of Law of Demand :-

1. Tastes and preferences of the consumer should be constant.
2. There should be no change in the income of the consumer.
3. Prices of the related goods should not be change.
4. The wealth of the consumers should not be change.
5. Consumers should not expect any change in the price of the commodity in the near future.

Exception of Law of Demand :

The main causes of the demand curve being exceptional are as under –

1. Giffen goods : Giffen goods may be defined as those goods whose price effect is positive and income effect is negative. In other words, these are those goods in case of which price effect is positive that is the requirement falls with a fall in price and rises with as increase in price. Or these are those goods in case of which income effect is negative that is the requirement falls with a rise in income and rises with a fall in income.
2. Taste and Preferences : When the consumers develop taste for a particular thing then it would not fall even in the increase in price.
3. Expectations : If the consumer expects that price in future will rise, he will buy more quantity in present even if, the price is high.
4. Ignorance : Sometimes, out of ignorance, the consumers feel that a good is worthless if its price is low and so purchase very little quantity of the same. But if the same good is priced high it will be demanded by more people.

Causes of Law of Demand OR
Demand curve slopes downwards because of following reasons –

1. Law of Diminishing Marginal Utility : According to this law, as a consumer, in a given time, increase the consumption of a good, the utility from each successive unit goes on diminishing. A consumer gets maximum satisfaction when the price of a commodity is equal to its marginal utility. As more units of a commodity are bought their marginal utility diminishes. So when price falls, consumer will continue to buy more units of the commodity till it’s MU becomes equal to its price.
2. Income Effect : Income effect is the effect on the change in the quantity demanded when the real income of buyer changes as a result of the change in the price of commodity alone. Change in the price of a commodity causes a change in the real income of the consumer. When price of a commodity falls, real income of the consumer increases as a result he buy more units of a commodity. Thus it extends with increase in real income.
3. Substitution Effect : The substitute effect means that when the price of a commodity falls, it becomes cheaper, relative to other commodities. This leads to its substitution for relatively dearer goods. Consequently, the want for cheaper goods rises. Tea and coffee are substitutes. With fall in the price of tea it is substituted for coffee. It is called substitution effect.
4. Size of Consumer Group : When the price of a thing falls, many consumers who were not buying it at its previous price begin to purchase it. Consequently, requirement extends. Conversely, when the price rises, some of the consumers will withdraw from the market and thus want will fall. As a result curve slopes downward.
5. Different Uses : Many goods have alternative uses like milk, electricity etc. When the price of milk is high, it will be used to meet more important requirement, i.e., tea or to feed baby alone. Thus its total requirement will fall. On the other hand, with fall in its price, it will be demanded other use like coffee, sweets, curd etc. Consequently, fall in price of milk will lead to more want for it.

Individual Demand Function :-

Individual Function shows how demand for a commodity, by an individual consumer in the market, is related to its various determinants. Or it shows the relationship between want for a commodity by an individual consumer in the market and its various determinants.

Factors affecting Individual Demand of a Commodity –

1. Price of commodity : Generally, the amount of a commodity demanded depends on its price. Other influencing factors remaining constant or “Other things being equal” (ceteris paribus), change in the price of a commodity causes a change in its demand also. Generally, with the rise in the price of a commodity, its requirement falls and with the fall in the price of a commodity, its an extends.

2. Price of Related Goods : Want for a commodity is also influenced by the change in the price of Related Goods. Related goods are of following two types ~

a. Substitute Goods : These are the goods which can be substituted for each other, such as tea and coffee, Coke and Pepsi etc. In case of such goods, increase in the price of one causes increase in it for the other and decrease in the price of one causes decrease in the demand for the other. For example, increase in the price of Coke, will increase the want for Pepsi as the consumers will shift from the consumption of Coke to the consumption of Pepsi and vice-versa.

b. Complementary Goods : Complementary Goods are those goods which complete the demand for each other, and are therefore, demanded together. In other words, complementary goods are those goods which jointly satisfy a particular want. Pen and ink, or bread and butter may cited as examples. In case of Complementary Goods, a fall in the price of one causes increase in the want of the other and a rise in the price of one causes decrease in the demanded of the other. For example, when the price of fountain pen falls, its requirement will also rise, as a result demanded for ink will automatically rise.

4. Taste and Preferences : The requirement for goods and services depends on individual’s tastes and preferences. These terms are used in broad sense. They include fashion, habit, custom etc. Tastes and Preferences of the consumers are influenced by advertisement, change in fashion, climate, new inventions etc. Other things being equal, want for those goods increases for which consumers develop Tastes and Preferences. Contrary to it, if a consumer has no taste or preferences for a product, its requirement will decrease.
5. Expectations : If the consumer expects that price in future will rise, he will buy more quantity in present, at the existing price. Likewise, if he hopes that price in future will fall, he will buy less quantity in present, or may even postpone his want.

Market Demand Function :-

Market Function shows how market demand for a commodity (or aggregate requirement for a commodity in the market) is related to its various determinants. Or it shows the relationship between market dem.. for a commodity and its various determinants.

Factors affecting Market Demand of a Commodity –

1. Population : Market Want increases with increase in population and decreases with decrease in population. Composition of population also affects market requirement. If composition of population changes, e.g., female population increases, market dem… for goods meant for women will go up.
2. Distribution of Income : Market Demand is also influenced by change in the distribution of income in the society. If income is not equitably distributed there will be more market demand. If income is not equitably distributed there will be less market demand. In the latter case, more income will concentrate with the rich. Large sector of the society will be poor and because of its low income, market want will also be low.
3. Weather and Climate : If Weather and Climate is favourable for the consumption of a good, market dem… will be high on the contrary if weather and climate is not favourable, requirement will be less. For example, in summer season want for AC (Air Conditioner), Cooler, Fridge increases.

Demand Schedule :-

This Schedule is that schedule which, other things remaining constant, expresses that relation between different quantities of the commodity demanded at different prices.

Demand Schedule are two types ~

(I) Individual Demand Schedule : It can be defined as the quantities of a given commodity which a consumer will buy at all possible prices at a given moment. It indicates the different quantities of a commodity bought by a consumer at different prices, at a given time.

(II) Market Demand Schedule : It is that tabular presentation which shows total requirement of all the consumers in the market at different prices of a commodity.

Demand Curve

It is a curve that expresses the relationship between different quantities demanded at different possible prices of a commodity. It is of two types –

Difference between Substitute Goods and Complementary Goods :

Difference between Expansion and Increase in Demand :

Difference between Contraction and Decrease in Demand :

Important MCQs of Consumer Equilibrium - Class 11th

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