Demand

(Content: Prof. Vishwa Ballabh)
Quantity demanded means the amount of a goods that buyers are willing and able to purchase.

The law of demand states that other things equal (ceteris paribus), the quantity demanded of a good falls when the price of the good rises.

Demand schedule is a table that shows the relationship between the price of a good and quantity demanded. Example: Price of Gulab Jamun in Rs. / Demand in Pieces, 5 / 5, 6 / 5, 7 / 4, 8 / 3, 9 / 1, 10 / 0, and so on.

Demand Curve

A demand curve is a graph showing the relationship between the price and demand of a particular good.

Sample Demand Curve

Shifts in Demand Curve

The sum of individual demands form the market demand. Any change that raises the quantity that buyers wish to purchase at a given price shifts the demand curve to the right. Any change that lowers the quantity that buyers wish to purchase at a given price shifts the demand curve to the left.

Other things equal:

• In case of normal goods, an increase in income leads to an increase in demand. Example: increase in salary of a BPO executive increases demand for pizza ;)


• In case of inferior goods, an increase in income leads to a decrease in demand. Example: substantial increase in salary of railway coolie may decrease demand for bidis, he may prefer cigarettes instead


• In case of substitutes, an increase in the price of one leads to an increase in the demand for the other. Example: increase in price of Britannia Marie may increase demand for ITC Marie


• In case of complements, an increase in the price of one leads to a decrease in the demand for the other. Example: increase in price of tea leaves may decrease demand for sugar

Prices of Related Goods

A change in the goods price represents a movement along the demand curve, whereas a change in one of the other variables (income, price of related goods, tastes, expectations, number of buyers) shifts the demand curve itself.

Elasticity of Demand

Elasticity a measure of the responsiveness of quantity demanded one its determinants

Price Elasticity of Demand

It is a measure of how much the quantity demanded of goods responds to a change in the price of that good. It is calculated as (Percentage change in quantity demanded / Percentage change in price). Since price and quantity demanded are inversely related, price elasticity of demand is negative for all but Griffins goods (the set of Griffins goods keep changing with respect to time and place, to get more confused about this topic, check out http://freakonomics.blogs.nytimes.com/2008/05/05/the-indiana-jones-of-economics-part-i/). All percentage changes are calculated using the midpoint method

The price elasticity of demand depends on: availability of close substitutes, necessities versus luxuries, definition of the market and time horizon

Total Revenue

It is the amount paid by buyers and received by sellers of a good, computed as the price of the good times this quantity sold.

Total Revenue

General Rules:

• When demand is inelastic (a price elasticity less than 1), price and total revenue move in the same direction
• When demand is elastic (a price elasticity greater than 1 ), Price and total revenue move in opposite directions
• If demand is unit elastic (a price elasticity exactly equal to 1), total revenue remains constant when the price changes

Income Elasticity of Demand

It is a measure of how much the quantity demanded of a good responds to a change in consumers income, computed (Percentage change in quantity demanded / Percentage change in income)

Cross-Price Elasticity of Demand

It is a measure of how much the quantity demanded of one good responds to a change in the price of another good. It is calculated as (Percentage change in quantity demanded of good 1 / Percentage change in the price of good 2).