Individual and market demand
Demand = the quantity of a good a buyer is willing and able to buy at a given price in a given time. Wanting without money is not demand.
Market demand = sum of the demand of all buyers at each price. We add the quantities at the same price (horizontal summation).
| Price ₹ | A | B | Market |
|---|---|---|---|
| 10 | 2 | 1 | 3 |
| 8 | 4 | 2 | 6 |
| 6 | 6 | 4 | 10 |
| 4 | 8 | 6 | 14 |
| 2 | 10 | 8 | 18 |
Determinants of demand
- Own price: price up, quantity down (law of demand).
- Income: for a normal good demand rises with income; for an inferior good (like coarse grain) demand falls as income rises.
- Prices of related goods: substitutes (tea and coffee): coffee price up → tea demand up. Complements (car and petrol): petrol price up → car demand down.
- Tastes and preferences: fashion, advertising, weather.
- Expectations of future prices.
- Number of buyers (population) and income distribution: these affect market demand.
Demand function: Dx = f(Px, Y, Pr, T, E, N).
Demand schedule and demand curve
A demand schedule is a table of prices and quantities demanded. A demand curve is its graph, price on the y-axis and quantity on the x-axis. It usually slopes downward.
Law of demand
Other things remaining the same, quantity demanded rises when price falls and falls when price rises.
Why? (1) Substitution effect: the good becomes cheaper than others. (2) Income effect: a lower price raises real income. (3) Diminishing MU: a buyer pays less for extra units. (4) New buyers enter at lower prices.
Exceptions: Giffen goods, status (Veblen) goods, fear of future price rise, necessities.
Movement along vs shift of the demand curve
| Movement along the curve | Shift of the curve |
|---|---|
| Cause: own price changes | Cause: any other factor changes |
| Expansion (price falls, more bought) or contraction (price rises, less bought) | Increase (curve shifts right) or decrease (curve shifts left) |
| Same curve | New curve |
Rightward shift examples: income rises (normal good), price of a substitute rises, price of a complement falls, good becomes fashionable.
Price elasticity of demand
Price elasticity of demand (Ed) measures how strongly quantity demanded reacts to a change in price. We usually drop the minus sign.
Degrees
- Ed = 0: perfectly inelastic (vertical line).
- Ed < 1: inelastic.
- Ed = 1: unitary elastic (rectangular hyperbola).
- Ed > 1: elastic.
- Ed = ∞: perfectly elastic (horizontal line).
Percentage method
Ed = (% change in quantity) ÷ (% change in price) = (ΔQ/Q) ÷ (ΔP/P) = (ΔQ/ΔP) × (P/Q), using the original P and Q.
Total expenditure method
| Price falls, TE… | Ed |
|---|---|
| rises | > 1 |
| stays same | = 1 |
| falls | < 1 |
TE = P × Q. Price and TE move in opposite directions when Ed > 1, same direction when Ed < 1.
Geometric (point) method on a straight line
Ed at a point = lower segment ÷ upper segment. At the midpoint Ed = 1; above it > 1; below it < 1.
Factors affecting Ed
- Nature of good: necessities inelastic, luxuries elastic.
- Availability of close substitutes: more substitutes → more elastic.
- Share of income spent: tiny share (salt, matchbox) → inelastic.
- Number of uses: many uses (electricity) → elastic.
- Time: longer time → more elastic.
- Habits: habit goods inelastic.
- Possibility of postponing: can wait → elastic.
Try it at home
Ask 5 family members how many samosas each would buy at ₹20, ₹15, ₹10 and ₹5. Add them for each price (market demand), draw the curve, and use the percentage method between ₹20 and ₹15. Then check with total spending at each price.
Key formulas and definitions
- Market demand = Σ individual demand at each price
- Ed = (% ΔQ) ÷ (% ΔP) = (ΔQ/ΔP) × (P/Q)
- TE = P × Q; P↓ TE↑ ⇒ Ed > 1; TE same ⇒ Ed = 1; TE↓ ⇒ Ed < 1
- Point method: Ed = lower segment ÷ upper segment
Worked examples
1. Price falls from ₹10 to ₹8 and quantity rises from 4 to 8. Find Ed.
%ΔP = −2/10 × 100 = −20%. %ΔQ = 4/4 × 100 = 100%. Ed = 100/20 = 5 (elastic).
2. Price rises from ₹20 to ₹25 and quantity falls from 100 to 90. Find Ed.
%ΔP = 5/20 = 25%; %ΔQ = −10/100 = −10%. Ed = 10/25 = 0.4 (inelastic).
3. Ed = 2. Price falls by 10%. By what % does quantity demanded rise?
%ΔQ = Ed × %ΔP = 2 × 10 = 20%.
4. At ₹5 a buyer buys 40 units; at ₹4 she buys 50. Use the total expenditure method.
TE at ₹5 = 200; at ₹4 = 200. TE unchanged, so Ed = 1.
5. Ed = 1.5; price rises from ₹40 to ₹44 and original quantity is 200. Find the new quantity.
%ΔP = 10%. %ΔQ = 1.5 × 10 = 15% fall = 30 units. New quantity = 170.
6. Price of coffee rises. What happens to the demand curve of tea?
Tea is a substitute, so demand for tea increases: the whole curve shifts right.
Common mistakes
- Calling a rise in quantity due to a price fall an "increase in demand". It is an expansion (movement along).
- Using the new price and quantity as the base in the percentage method. Use the original values.
- Mixing up the slope of the demand curve with elasticity. A straight line has the same slope everywhere but different Ed at each point.
- Thinking inferior goods are low-quality goods only. An inferior good is one whose demand falls as income rises.