Demand and Law of Demand (B.Com Hons) Notes || Unit 2

Unit-II : Demand and Law of Demand

Meaning of Demand

• Demand refers to the quantity of a commodity or service that consumers are willing and able to purchase at various prices during a given time period.

Determinants of Demand

1. Price of the Good
2. Income of the Consumer
3. Prices of Related Goods (Substitutes and Complements)
4. Tastes and Preferences
5. Expectations about Future Prices
6. Population and Demographics
7. Government Policies
8. Seasonal Factors

Kinds of Demand

1. Individual Demand vs Market Demand
2. Joint Demand
3. Derived Demand
4. Composite Demand

Importance of Demand

1. Guides production decisions.
2. Helps in price determination.
3. Basis of market forecasting.
4. Determines allocation of resources.

Schedule and Curve of Demand

• Demand Schedule: A tabular representation showing quantities demanded at various prices.
  • Individual Demand Schedule.
  • Market Demand Schedule.
• Demand Curve: A graphical representation of the demand schedule, typically downward-sloping from left to right.

Law of Demand

• Definition: All else being equal, the quantity demanded of a good decreases when its price rises and increases when its price falls.
• Assumptions of the Law:
  • No change in income, tastes, preferences, or related goods’ prices.
  • The good is a normal good.
  • No anticipation of future price changes.

Exceptions to the Law of Demand

1. Giffen Goods
2. Veblen Goods (Prestige Goods)
3. Necessities
4. Speculation
5. Ignorance Effect

Reasons for the Application of Law of Demand

1. Income Effect
2. Substitution Effect
3. Law of Diminishing Marginal Utility

Movement along the Demand Curve vs Shift in the Demand Curve

• Movement along the Demand Curve: Change in quantity demanded due to price changes.
• Shift in the Demand Curve: Change in demand due to factors other than price (e.g., income, tastes).

Elasticity of Demand

Concept of Elasticity of Demand

• Definition: Elasticity of demand measures the responsiveness of quantity demanded to a change in one of its determinants (price, income, etc.).

Types of Elasticity of Demand

1. Price Elasticity of Demand (PED)
2. Income Elasticity of Demand (YED)
3. Cross Elasticity of Demand (CED)
4. Advertising Elasticity of Demand (AED)

Factors Affecting Elasticity of Demand

1. Nature of the good (necessity or luxury).
2. Availability of substitutes.
3. Proportion of income spent on the good.
4. Time period under consideration.
5. Addiction or habit.

Importance of Elasticity of Demand

1. Pricing decisions for businesses.
2. Government tax policies.
3. Determining the incidence of taxes.
4. Assessing foreign trade impact.
5. Economic welfare analysis.

Price Elasticity of Demand

• Meaning: Measures the responsiveness of quantity demanded to a change in price.
• Degrees of Price Elasticity:
  1. Perfectly Elastic Demand ($E_d = \infty$)
  2. Perfectly Inelastic Demand ($E_d = 0$)
  3. Unit Elastic Demand ($E_d = 1$)
  4. Elastic Demand ($E_d > 1$)
  5. Inelastic Demand ($E_d < 1$)

Methods of Measuring Price Elasticity of Demand

1. Percentage Method ($E_d = \frac{\%\Delta Q}{\%\Delta P}$)
2. Total Expenditure Method
3. Point Method

Other Elasticities

1. Income Elasticity of Demand: Measures responsiveness of demand to income changes.
2. Cross Elasticity of Demand: Measures responsiveness of demand for one good to a price change in another good.
3. Advertising Elasticity of Demand: Measures responsiveness of demand to advertising expenditure changes.