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LAW OF DEMAND

WHAT IS DEMAND?

Is it Desire or Want?

Demand means the quantity of goods and services


which a person not only desires to purchase and
can able to purchase but also ready to purchase at
a given prices at a given point of time.
According to Benham: The demand for anything,
at a given price, is the amount of it, which will be
bought per unit of time, at that price.
According to Bobber, By demand we mean the
various quantities of a given commodity or service
which consumers would buy in one market in a
given period of time at various prices.

DEMAND
Thus Demand Comprises of
1. Desire for commodity
2. Sufficient resources i.e money to satisfy
desire
3. Willingness to spent that money.

LAW OF DEMAND
Prof. Samuelson: Law of demand states that
people will buy more at lower prices and buy less
at higher prices, others thing remaining the same.
Ferguson: According to the law of demand, the
quantity demanded varies inversely with price.
Assumptions:
1. The price of the related commodities should not
change.
2. Consumers income must remain the same.
3. No change in tastes and preference of the
consumers.
4. Expectations should be constant.

EXPLANATION OF LAW OF DEMAND

Demand Schedule: A tabular presentation showing different quantities


of a commodity that would be demanded at different prices.

Types of Demand Schedules

Individual Demand Schedule


Price
Qty
dd

Market Demand Schedule


Price

M.D.S

EXPLANATION OF LAW OF
DEMAND

The Graphical Representation of Demand Schedule is called a Demand Curve.


It is of two types:
TYPES OF DEMAND CURVE

Individual DC

Market DC

WHY DOES DEMAND CURVE


SLOPES DOWNWARDS?
1.
2.
3.
4.
5.

LAW OF DMU
INCOME EFFECT
SUBSTITUTION EFFECT
DIFFERENT USES
SIZE OF CONSUMER GROUP

EXCEPTIONS TO LAW OF
DEMAND
1.

2.
3.
4.
5.

Articles of Distinction or Veblen goods


(Given by Thorstein Veblen- Theory of
Leisure Class 1899).
Ignorance
Giffen goods (Sir Robert Giffen-1895)
Necessities of life
War or Emergency

DETERMINANTS OF DEMAND
1.
2.
3.
4.
5.
6.

Price of the commodity (P)


Price of Related goods(Pr)
Income of the consumer(Y)
Taste and preferences of the consumer(T)
Expectations of the consumer (E)
Habits of the consumer(H)

DETERMINANTS OF DEMAND
Price of the Commodity
Price of Related goods

1.
2.

Substitute Goods
Complementary goods

i.
ii.

Income of the consumer

3.
i.
ii.

iii.

Normal goods
Inferior goods
Necessities of life

DETERMINANTS OF DEMAND
4.
5.
6.

Taste and Preferences of consumer


Expectations of consumer
Habits of consumer

CHANGE IN DEMAND
It is of two types:
Movement along the same
demand curve

Extension
in demand

Contraction
in demand

Shift in the demand curve

Increase in
demand

Decrease in
demand

SHIFT IN DEMAND CURVE

DIFFERENCE BETWEEN CONTRACTION


IN DEMAND AND DECREASE IN DEMAND
BASIS

CONTRACTION IN DEMAND

DECREASE IN DEMAND

Meaning

Ceteris-paribus, with rise in When less is demanded at


price the quantity
same price and same is
demanded contracts.
demanded at lesser price.

Demand
Schedule
Demand Curve
Nature

There is a movement along


the same demand curve

There is a
downward/leftward/inwar
d shift in the demand
curve.

Factors

This is due to rise in Price,


other things being equal.

Due to change in other


factors determining
demand except price.
For Ex: Fall in price of
Substitute goods

TYPES OF DEMAND
Autonomous demand & Derived demand:
Spontaneous demand for goods which is based
on the urge to satisfy some wants directly.
Derived demand: when demand for a product is
tied to the purchase of some parent product, it is
called derived demand.
2. Short run & Long run demand
3. Price demand, Income demand and Cross
demand
4. Individual demand and Market demand
1.

DEMAND FORECASTING

Demand forecasting/estimation refers to the


prediction of probable demand for a product
or a service on the basis of the past events
and prevailing trends in the present.

According to Evan J. Donglas, Demand


estimation may be defined as the process of
finding values for demand in future time
periods.

METHODS OF DEMAND
FORECASTING
The most commonly used techniques of
demand forecasting are:
1. Buyers Survey.(opinion survey): it is to
ask customers, what they are going to buy
for the forthcoming period.
2. Delphi Method: It consists of an attempt to
arrive at a consensus in an uncertain area
by questioning a group of experts
repeatedly until the responses appear to
converge along a single line or issues
causing disagreement are clearly defined.

3.

4.

5.

Sales force polling: Salesmen are required to


estimate expected sales in their respective
territories and sections.
Time series and Trend Projections: In this
method the firm which has been in existence
from some time will accumulate data
pertaining to different time periods. Such
data when arranged chronologically yield
time series.
Regression Analysis: It attempts to assess
the relationship between at least two
variables (one or more independent and one
dependent), the purpose being to predict the
value of the dependent variable from the
specific value of the independent variable.

6.

7.

Simulated Market Situations: selected


participants are given certain sum of
money and asked to spend it in an
departmental store. Different prices and
promotional efforts are put up for different
group of participants.
Judgment Approach.

CRITERIA FOR GOOD


FORECASTING METHOD

Accuracy
Simplicity
Economical
Availability
Timeliness.