Showing posts with label demand. Show all posts
Showing posts with label demand. Show all posts

Factors Determining Elasticity of Demand

It is difficult to say whether the demand for a commodity is elastic or inelastic. Whether the demand for a commodity is very elastic or less elastic depends on several factors. The main factors determining elasticity of demand can be explained as follows:
  1. Nature of commodity: The elasticity of demand depends on nature of the commodity. The goods are classified as necessary, comfort and luxury. In general, the demand for necessaries of life such as food grain, salt is inelastic. The increase in price does not reduce demand. In general, the demand for comfort and luxury such as T.V., car, smartphones is elastic. The decrease in price increases the demand for the demand these goods. But necessary and luxury are relative terms. So, for the same commodity, elasticity may differ from person to person. As for example, the demand for car is a necessary to the rich but luxury to the poor. Hence, demand for car may be inelastic for the rich and elastic for the poor.
  2. Existence of substitutes: The existence of substitutes also affects the elasticity of demand. As for example, tea and coffee are substitutes. If the price of tea increases people substitute coffee. So, the demand for tea is elastic. But the demand for the commodities having no substitute such as salt, potato, onion is relatively inelastic.
  3. Number of uses: When the commodities have several uses, the demand for such commodities is elastic. As for example, electricity. If the price of electricity fall, it is put to several uses such as in cooking, pressing clothes, using fan etc. The elasticity of demand may be different in different uses. As for example, the demand for electricity for cable car is inelastic, since it does not have alternative. But for domestic purpose such as for cooking, electricity can be substituted by gas. So, demand is elastic.
  4. Possibility of postponement: When the possibility of postponement of consumption of a commodity exists, the demand is elastic. As for example, the consumption of Coca-cola can be postponed. But in case of consumption of goods, which are urgently needed, demand will be inelastic. The consumption of rice cannot be postponed.
  5. Level of Prices: If the price is too high or too low, the demand for a commodity will be inelastic. In case of expensive goods like T.V., car, camera, phones, demand will be inelastic. This implies that a small change in price, say $100 will not have effect on demand. The demand will be elastic only if the price change is high. Likewise, the demand for low-priced goods such as salt, onion, newspaper is inelastic. A small change in price will not affect demand. Because, all might have already purchased the required quantity.
  6. Proportion of income spent: if the persons spend a small amount in a commodity, a change in its price will not affect demand or demand will be inelastic. As for example, the demand for cheaper goods such as salt, matches is inelastic. But in case of expensive commodity such as car, demand is elastic.
  7. Habit and custom: If the commodities are demanded or account of habit and custom, demand will be less elastic. As for example, the increase in price of cigarettes or wine does not reduce the demand. Likewise, due to custom, the increase in gold price does not reduce the demand for wedding ring.
  8. Consumer’s incomes: Generally, the higher a person’s income the more inelastic will be his demand for commodities. The demand of millionaire for all commodities may be unaffected by any change in price. For most people, however, choice has to be made. Lower the person’s income, the higher the need of choice.
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Measurement of Price Elasticity: Total Outlay Method

In general, elasticity of demand means price elasticity. The concept of price elasticity is widely used in demand analysis. There are three methods of measuring price elasticity – total outlay method, point method and arc method. Here we concentrate only on total outlay method.

Total Outlay Method or Expenditure Method


In total outlay method, we see the change in expenditure as a result of change in price. Then on the basis of change in expenditure, we say whether the elasticity is equal to unity or greater than unity or less than unity. This can be illustrated by the help of schedule and figures.

1. Elasticity of Demand Equal to Unity (Ed = 1)

If the change in price does not change the total expenditure, the elasticity of demand is said to be equal to unity. In the table, the price falls from $10 to $9 to $8, but the total expenditure (PQ) remains unaltered at $10,000. So, the elasticity of demand is equal to unity.

Demand Schedule with Different Elasticities
Elastic Demand
Unit Elastic Demand
Inelastic Demand
P
Q
PQ (TE)
P
Q
PQ (TE)
P
Q
PQ (TE)
$10
$9
$8
1,000
2,000
3,000
10,000
18,000
24,000
10
9
8
1,000
1,111
1,250
10,000
10,000
10,000
10
9
8
1,000
1,050
1,100
10,000
9,450
8,800
Adapted from Watson & Getz: Price Theory & Its Uses

The unitary elastic demand can be illustrated by the help of a figure below.

Unitary Elastic Demand

In the figure, at initial price OP, quantity demanded is OM and total outlay (PXQ) is equal to rectangle OMRP. When the price falls to OP1, quantity demanded increases to OM1, and total expenditure is equal to rectangle OM1R1P1. The total expenditure falls by the area marked (-) and rises by the area marked (+). The area (-) is equal to area (+). So, the spending remains unaltered. In other words, new total expenditure OM1R1P1 = initial total expenditure OMRP. So, elasticity of demand is equal to unity. When the demand curve is rectangular hyperbola, the elasticity of demand on all points of it is equal to unity.

2. Elasticity of Demand Greater than Unity (Ed > 1)

If the total expenditure increases with fall in price, elasticity of demand is said to be greater than unity. As shown in table, as the price falls from $10 to $9 to $8, the total expenditure increases from $10,000 to $18,000 to $24,000. So, the elasticity of demand is greater than unity. This can be illustrated by the help of following figure.

Greater Than Unity

In the figure, the total expenditure at price OP is equal to rectangle OMRP. When price falls to OP1, the total expenditure increases to the rectangle OM1R1P1. The total expenditure falls by area marked (-), but rises by the area marked (+). The area (+) exceeds the area (-). The total spending increases. Hence, the elasticity of demand is greater than unity.

3. Elasticity of Demand Less than Unity (Ed < 1)

If the total expenditure falls with fall in price, the elasticity of demand is said to be less than unity. As shown in table, as the price falls from $10 to $9 to $8, the total expenditure falls from $10,000 to 9,450 to $8,800. Hence, elasticity of demand is less than unity. This can be illustrated by the help of a figure below.

Less Than Unity

As shown in the figure, when price is OP, the total expenditure is equal to rectangle OMRP. When price falls to OP1, the total expenditure falls to the rectangle OM1R1P1. The total expenditure falls by the area marked (-) but rises by the area marked (+). The area (+) is smaller than the area (-). The total expenditure falls. Hence, elasticity of demand is less than unity.
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Cross Elasticity of Demand: Proportionate change in demand with change in price

Cross Elasticity of Demand


Some goods are related to each other. So a fall in the price of a commodity causes change in the demand for other commodity. As for example, demand for tea is related to the price of substitute, coffee. When the price of coffee increases, the demand for tea increases. Hence, cross elasticity of demand means the responsiveness of quantity demanded of a commodity to the change in price of other commodity. The cross elasticity of demand is defined as the percentage in the quantity demand of good x resulting from a 2 percent change in the price of good y.
According to C. E. Ferguson, “Cross elasticity is the proportionate change in the quantity demanded of good x divided by the proportionate change in the price of y.”
The formula to calculate cross elasticity is,

Cross Elasticity = Proportionate change in quantity demanded of x/Proportionate change in price of y

Symbolically, Ec = Î”qx/Δpy x Py/Qx

The concept of cross elasticity can be illustrated by the help of a numerical example. Suppose that x and y are two substitute goods. Suppose when the initial price of y is $4.50, the initial quantity of x is 60kg. Now when the price of y increases to $5, the quantity demanded of x increases to 70kg. The cross elasticity is calculated as,

Ec = Î”qx/Δpy x Py/Qx 
= 10/5.0 x 4.5/60 = 3/2 = 1.5

1.5 coefficient shows that the cross elasticity is positive.

Types of Cross Elasticity


The goods may be either substitutes or complements. So the cross elasticity is of two types as follows:

1. Positive Cross Elasticity (Ec > 1)

When two goods are substitutes of each other, the cross elasticity is positive. As for example, tea and coffee. The increase in price of one commodity leads to an increase in quantity demanded of other commodity. Because, people substitute one commodity for other.

Positive Cross Elasticity

In the figure, demand curve DD shows positive cross elasticity. Because, with the increase in price X from OP to OP1, demand for Y has increased from OM to OM1.

2. Negative Cross Elasticity (Ec < 0)

When two goods are complements, cross elasticity is negative. As for example, shoe and shoelaces. The increase in price of one commodity causes fall in the quantity demanded of other commodity.

Negative Cross Elasticity

In the figure, demand curve DD shows negative cross elasticity. Because due to the increase in price of X from OP to OP1, demand for Y has declined from OM to OM1.

When the goods are not related to each other, the cross elasticity is zero. As for example, book and coat. The change in price of one does not affect the demand for other. Hence, the demand curve will be a vertical straight line. But this is not counted as cross elasticity.
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Income Elasticity of Demand: Proportionate change in quantity demanded per change in income

Income Elasticity of Demand


The income elasticity measures the responsiveness in quantity demanded to the change in income. In other words, it measures by how much the quantity demanded changes with change in income. The income elasticity of demand is defined to be the percentage change in quantity demanded resulting from a 1 percent change in consumer’s income.

According to C. E. Ferguson, “Income elasticity of demand is the proportionate change in quantity demanded divided by proportionate change in income.”

The formula to measure income elasticity is,

Income elasticity = Proportionate change in quantity demanded/Proportionate change in income

Symbolically, 
Ey = Î”q/Δy  x   y/q

Where, y denotes income

The concept of elasticity of income can be illustrated by the help of an example. Suppose that when the income is $100, demand is 25 units. Now suppose that the income increase to $150. As a result of its demand increases to 30 units. The elasticity of income is calculated as,

Ey = Î”q/Δy  x   y/q 
= 5/50 x 100/25 = 2/5

The coefficient 2/5 shows that the demand is inelastic.

Types of Income Elasticity

There are three types of income elasticity in practice. They are:

1. Positive income elasticity (Ey > 0)

If the demand for the commodity increases with increase in income elasticity is said to be positive. For most commodities increase in income lead to increases in quantity demanded. Such goods are called normal goods. Normal goods have positive income elasticities.

2. Negative Income Elasticity (Ey < 0)

If the demand decreases in income, income elasticity is said to be negative. Inferior goods such as cheap foods have negative income elasticities.

3. Zero Income Elasticity (Ey = 0)

The boundary between positive and negative income elasticity is zero income elasticity. If the demand for the commodity does not change with the increase in income, income elasticity is said to be zero. This happens in case of neutral goods such as salt, matches etc.

These three types of income elasticity have been shown in a single diagram below:

Types of Income Elasticity

In the figure, demand curves show zero, positive and negative income elasticity. Good A has zero income elasticity. Good B is a normal good with a positive income elasticity. Good C is an inferior good with a negative income elasticity.

It should, however, be noticed that a good does not have to be in the same category at all levels of income. The same good may have zero income elasticity at very low level of income; positive elasticity at higher level of income and negative income elasticity at very high level of income.

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Elasticity of Demand: Types of Price Elasticity of Demand

Elasticity of Demand


The term ‘elasticity’ denotes the quantity of a good to expand and contract. Hence, the change in quantity demanded due to change in price is called elasticity of demand. The economists like Courot, J. S. Mill, introduced the concept of elasticity of demand in economics. The credit is given to Dr. Alfred Marshall for the development of this concept.

The law of demand tells that the quantity demanded of a commodity varies inversely with price. But it does not tell how much quantity demanded changes with change in price. This task is accomplished by elasticity of demand. The elasticity of demand tells by how much the quantity demanded changes with change in price.
In the words of Alfred Marshall, “The elasticity (or responsiveness) of demand in a market is great or small according as the amount demanded increase much or little for a given fall in price and diminishes much or little for a given rise in price.”
According to Stonier and Hague, “Elasticity of demand is, therefore, a technical term used by the economists to describe the degree of responsiveness of the demand for the commodity to a fall in its price.”
In brief, elasticity of demand measures the rate of change in quantity demanded as a result of the change in price.

Kinds of Elasticity of Demand

Broadly speaking, there are three main types of elasticity of demand. They are price elasticity, income elasticity and cross elasticity.

Price Elasticity of Demand

In general, elasticity of demand means price elasticity of demand. This concept is most popular and most frequently used. Price elasticity means the responsiveness of quantity demanded to the change in price. The price elasticity of demand is defined to be the percentage change in quantity demanded resulting from 1 percent change in price. The price elasticity shows at what rate the demand changes with change in price. In the words of C. E. Ferguson, “Price elasticity is the proportionate change in quantity demanded divided by the proportionate change in price.”

The formula to find out price elasticity is,

Price elasticity = Proportionate change in quantity demanded/Proportionate change in price

Symbolically,

Ep = Î”q/Δp x p/q

Where Ep = elasticity of price, P = price, Î” = small change and q = quantity. The concept of price elasticity can be illustrated by the help of a numerical example. Suppose that the original price (P1) of a commodity is $10 per unit and quantity demanded (Q1) is 2000 units. Now suppose that when price (P2) fall to $9, quantity demanded increases to 2500 units. The price elasticity is calculated as follows:

Ep = Î”q/Δp x p/q

= 500/-1 x 10/2000 = -5/2 = -2.5

It shows that the quantity demanded increase by 2.5 percent with one percent fall in price. The minus sign shows the inverse relationship between price and quantity demanded. In general, this sign is not used, since the inverse relationship is an implied one. 2.5 is called co-efficient of elasticity of demand. The coefficient >1, =1, <1, =0 and = ∞ shows elastic, unitary elastic, inelastic, perfectly inelastic and perfectly elastic demand respectively.

Types of Price Elasticity

The price elasticity of demand is classified into following five parts:

1. Perfectly Elastic Demand (Ep = ∞ )

The demand is said to be perfectly elastic if the quantity demanded increases in unlimited quantity with small fall in price or quantity demanded falls to zero with a small rise in price. Such situation is rarely found in real life.

Perfectly Elastic Demand

In figure, demand curve DD is a horizontal straight line or parallel to the OX axis. It shows that the negligible change in price causes infinite rise or fall in quantity demanded.

2. Perfectly Inelastic Demand (Ep = 0)

If the demand remains constant whatever be the price, demand is said to be perfectly inelastic. The case of perfectly elastic demand is also rarely found in real life.

Perfectly Inelastic Demand

In the figure, the demand curve DD is a vertical straight line. It shows that the demand remains constant whatever be the change in price. As for example, even after the increase in price from OP to OP1 and fall in price from OP to OP2, the quantity demanded remains OM.

3. Relatively Elastic Demand (Ep > 1)

If there is a great change in demand with a small change in price, it is called relatively (more) elastic demand. The demand for luxury goods is considered to be more elastic.

Relatively Elastic Demand

In the figure, the demand curve DD is more flatter which shows that the demand is more elastic. The small fall in price from OP to OP1, has led to greater increase in demand from OM to OM1. Likewise, demand decrease more with small increase in price.

4. Relatively Inelastic Demand (Ep < 1)

If there is small change in demand with greater change in price, the demand is said to be relatively inelastic. The demand for basic goods such as salt, matches are said to be less elastic.

Relatively Inelastic Demand

In the figure, demand curve DD is steeper which shows that the demand is less elastic. The greater fall in price from OP to OP1 has caused small change in demand from OM to OM1. Likewise, great increase in price leads to small fall in demand.

5. Unitary elastic demand (Ep = 1)

If the ratio of change in demand is equal to the ratio of change in price, the demand is said to be unitary elastic. This kind of elasticity is also an imaginary one.
Unitary Elastic Demand

In the figure, demand curve DD is a rectangular hyperbola, which shows that the demand is unitary elastic. The fall in price from OP to OP1 has caused equal proportionate increase in demand from OM to OM1. Likewise, when price increase, the demand decreases in the same ratio.

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Law of Demand: Higher the price, the smaller the quantity demanded

Law of Demand


The law of demand is one of Alfred Marshall’s many contributions to economic theory. The demand varies inversely with price. The lower the price, the larger the quantity demanded. Similarly, the higher the price, the smaller the quantity demanded. This inverse relationship between price and quantity demanded is often called the Law of Demand. This law may be stated as – “Other things being equal, the higher the price of a commodity, the smaller is the quantity demanded and lower the price, the larger the quantity demanded.”

This law is based on The Law of Diminishing Marginal Utility. According to this law, when a man consumes more and more of a commodity, the utility from latter units declines. Hence, at a given time in given market, people will not buy more of a commodity unless its price becomes lower. The lower price induces the persons already buying to buy more and other persons to start buying.

The law of demand is based on several assumptions:
  1. Taste and preference of the consumer remain constant.
  2. Prices of substitutes and complements remain constant.
  3. Consumer’s income is fixed and constant.
  4. The size of the population is unchanged.
  5. There is no change in distribution of income and wealth.
Demand Schedule
Price ($)
Quantity
12
10
8
6
4
2
2
3
5
7
10
14

A demand schedule shows the relationship between two variables, price and quantity. To be more precise, it indicates the quantity demanded by the consumer at each price. As shown in the demand schedule, when price per unit is $12, the quantity demanded is 2 units, when price falls to $10, $8, $6 and $4 per unit, the quantity demanded increases to 3, 5, 7 and 10 units respectively.

This law can also be illustrated with the help of a diagram known as demand curve. When the demand schedule is displayed geometrically, it is called demand curve. The demand curve also shows the price-quantity relation as the demand schedule.

Law of Demand

In figure, OX axis represents quantity demanded and OY axis represent price. DD is the demand curve. The demand curve has been constructed on the basis of the demand schedule. It shows that when price is $12 per unit, the quantity demanded is 2 units. When the price falls to $10, the quantity demanded increases to 3 units. When the price further falls to $8, the quantity demanded increases to 5 units and so on.

The slope of a demand curve is negative. It always slopes downwards from left to right. It implies that when the price of a commodity falls, the quantity demanded of that commodity increases.

Causes of Demand Curve Sloping Downwards

The demand curve slopes downwards to the right due to the following reasons:
  1. Law of Diminishing Marginal utility: According to this law, as a consumer consumes more and more of a commodity, the marginal utility of the commodity goes on declining. Hence, people demand more only when the price falls.
  2. Income effect: When the price of a commodity falls, there is an increase in the real income or purchasing power of people. Hence, they are able to buy more of that commodity.
  3. Substitution effect: When the price of a commodity falls, it becomes cheaper than other commodities. So people buy more of this goods or substitute this goods for other.
  4. New consumers: When the price of a good fall, new consumers who did not buy before due to inability to buy also buy. So, the demand for the commodity increases. As for example, the transistors made in Khasa of China has decreased considerably. As a result of this, many people have started to buy transistors.
  5. Put to less important uses: When a commodity becomes cheaper, people are inclined to put them to less important uses. Hence, the demand increases when the price of a commodity falls.

Exceptions to the Law of Demand

There are several limitations to the law of demand, which are as follows:
  1. Judged by price: This exception is associated with the name of T. Veblen and his doctrine of conspicuous consumption. If consumers measure the commodity entirely by its price, they will buy less of the commodity when the price falls, and more when the price rises. As for example, the demand for diamond for personal use or premium priced beer. The demand for diamond by rich falls when price decrease.
  2. Giffen Goods: The other exception is associated with the name of Robert Giffen. According to him, a rise in the price of bread causes to buy more bread, not less. Because, the wage earners subsist on the diet mainly on bread. When its price rises, they have to spend more money for a given quantity of bread. So, to maintain their intake of food, they buy more bread at higher price. According to Watson and Getz, these two exceptions to the law of demand are quite important.
  3. Price exception: To quote Watson and Getz again, the other exceptions to the law of demand are only apparent not real. When the consumers expect the price to fall even further, they do not buy more even if the price is lower. Likewise, when the consumer expect further rise in price, they buy more even if the price is higher.
  4. Articles sold under two brand name: The article may be sold under two brand names at the same time. The consumers buy more of the higher-priced brand than the lower-priced brand even though the articles are more or less identical. But the consumers think that the two brands are different. The two brands are taken as two different commodities.
  5. If shortage is feared: If people feel that the commodity is going to be scarce in future, they buy more of it even if the price is high. As for example, when people feel that cooking gas or kerosene is going to be of short supply in future, they buy more even if price is high.
  6. Out of fashion: If the commodity goes out of fashion, people do not buy more even if the price falls, as for example, people do not buy bell-bottom pants or pointed shoes these days even if their prices are lower relatively. Because, their use has gone out of fashion.
  7. Customs and tradition: The law of demand may not hold goods due to customs and traditions. As for example, the demand for clothes, goat increase during Dashain festival even if the prices are too much higher.
  8. Change in season: The law of demand may not hold good due to the change in season. The demand for umbrella does not rise even if price falls during winter season. Likewise, the demand for ice cream, Coca-Cola does not rise during winter even if price is substantially reduced.
  9. Necessaries of life: The necessaries of life are the things that the people cannot do without. Hence, even if the price of rice increases, the demand does not decrease.
  10. Change in income: If the income of people increase, they do not reduce demand for the commodities even if the price rise. On the contrary, if their income decreases, they reduce the demand even if the price of commodities falls.

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Derivation of Market Demand Curve and Shift in Demand Curve

Derivation of Market Demand Curve


An individual demand curve shows the demand of only an individual. But it is necessary to have the knowledge of total demand of all the consumers in market to explain the market behavior. The market demand schedule is derived from individual demand schedule by summing up the demand of all consumers at a particular price. The market demand schedule is prepared after deriving the total demand at different prices. This schedule when converted into a figure is called market demand curve. According to R. G. Lipsey –“the market demand curve is the horizontal sum of the demand curves of all the households in the market.”

The market demand curve shows the relationship of total quantity demanded with price. The price of other commodities, total household income, distribution of income and taste of consumers are assumed to be constant.


The quantity of sugar demanded by three consumers and the total market demand at different prices has been presented in the table below:

Individual and Market Demand Schedule
Price ($ per kilo)
Demand of A (Kilo per month)
Demand of B (Kilo per month)
Demand of C (Kilo per month)
Market Demand (Kilo per month)
2
4
6
8
10
12
40
30
24
18
14
10
45
35
30
20
15
13
18
16
13
12
11
8
103
81
67
50
40
31

A market demand curve is derived by the horizontal summation of the demand curves of all individuals in the market. The market demand curve has been presented in the figure below. It is derived on the basis of the above table.

Market Demand Curve

In the figure, DM is the market demand curve. The market demand curve is derived by summing up the individual demand curves. The market demand curve of a commodity can be derived by joining the points of quantity demanded at different prices.


Shift in Demand Curve

At first, it is necessary to distinguish between shifts in the demand curve and movement along a given demand curve.

Shift in Demand Curve

The distinction between these two kinds of demand change is very important. According to David Begg and others, “Movement along the demand curve represents consumer adjustment to changes in the market price. Shifts in demand, by contrast, represent adjustment to outside factors (other prices, income, tastes) and lead in turn to changes in equilibrium price and quantity”. The change in quantity demanded may occur only due to the change in the price of the commodity concerned. This makes a consumer move from one point of same demand curve. The change in quantity demanded due to the reasons other than price of the commodity causes shift in the entire demand curve.

In the figure, when demand curve is D, price is OP, the quantity demanded is OQ. Now suppose that the demand for the commodity increases. As a result of this, the demand curve shifts to the right in the form of D1. The quantity demanded increases from OQ to OQ1 at the same price. Likewise, if the demand falls, demand curve shifts to the left in the form of D2. The quantity demanded decreases from OQ to OQ2 at the same price. The change in demand leads to the change in equilibrium point. Hence, the shift in the demand curve changes the equilibrium price and quantity in the market. This can be shown only by using supply curve.

In general, when price of a commodity increases, less is demanded. But if demand increases, people buy more even if price rises. If the demand has increased due to increase in income, people buy more even at higher price. According to Watson and Getz, “A demand curve is like a still picture. Behind the price-quantity relation are always the tastes of buyers, their incomes, and the prices of substitute and complementary commodities. When they change, the demand curve changes, shifting to the right or to the left. Demand curves are thus in constant motion, motion picture would be far better than still photographs”.

Factors Causing the Shift in Demand Curve


The changes in demand causes shift in the demand curve. The changes in demand are caused by changes in income, tastes and prices of related goods such as substitutes and complements. The causes of changes in demand has been shown in the following table.

Causes of Change in Demand
Demand Increase
Demand Decrease
1. Consumer desires become stronger
2. Consumer incomes rise
3. Price of substitutes rise
4. Price of complements fall
1. Consumer desires become weaker
2. Consumer incomes fall
3. Price of substitutes fall
4. Price of complements rise.

The factors causing the shift in demand curve are as follows:

1. Price of related goods: The demand for a commodity and the price of related goods have two types of relationships. A fall in the price of a commodity may increase or decrease the demand for other commodity. If the fall in the price of one goods leads to the fall in the demand for other commodity, those goods are called substitutes. As for example, when price of coffee falls, the demand for tea falls. When price of coffee falls, consumers buy more of coffee and buy less of its substitute, tea. In case of substitutes, the demand for a commodity varies directly with the price of substitutes.

If the fall in price of a commodity leads to the rise in demand for other commodity, those goods are called complements. Because if the price of a commodity falls, more of it is consumed and the complementary goods is also consumed more. This kind of relationship exists in the goods that should be consumed together. As for example, pen and ink, car and petrol, shoe and shoelaces.

2. Consumer Incomes: The quantity demanded of a commodity changes with the change in consumer incomes. In general, when income increases, people demand more of a commodity. If the demand increases with the increase in income, such goods are called normal goods. On the contrary if the demand decreases with the increase in income, such goods are called inferior goods. Most goods are normal goods. The inferior goods are typically cheap. As consumer incomes rise, they spend less in cheaper goods like inferior quality rice.

3. Consumer tastes and fashion: The tastes and fashion of consumers change from time to time. If the consumer taste for a particular commodity increases, the demand for that commodity increases. On the other hand, if the taste decreases for that commodity, the demand for that commodity decreases. As for example, the taste for kurta-paijama among Nepalese women has increased these days, which has increases the demand for them. Likewise, the fashion for mini-skirts has reduced the demand for textile materials.

In past, the tastes and fashion were shaped by convenience, custom, and social attitudes. But they can be changed by advertisement and increase in knowledge.

4. Technological progress: The new commodities produced due to technological progress reduce the demand for old commodities. As for example, the demand for piano has declined and that of radio, television has increased. The supply of electricity has reduced the demand for kerosene mantles.

5. Change in size and composition of population: The increase in population increase the demand for goods and services. The scarcity of water at Kathmandu, and appreciable rise in price of food grains is due to high growth of population. Likewise, the change in composition of population also changes the demand for goods. The increase in female population leads to increase in demand for saris, lipsticks, and ornaments.

6. Change in distribution of income: The change in distribution of income in favor of the poor people increases the demand for many things. If the distribution of income is concentrated on rich, the demand for luxuries will be high.

7. Taxation policy: If the taxes are levied deliberately to reduce the demand for commodity, the demand will fall. Since few years back wines, beers and tobacco have been heavily taxed so as to reduce consumption. Similarly, high import taxes are levied on luxury goods such as motorcar, television, and video deck simply to reduce demand.

8. Change in real income: The increase in quantity of money increases the price level. This reduces the real income of people. Consequently people buy less due to fall in purchasing power. The increase in real income may have little effect on necessaries like foodstuffs. But it may considerably increase the demand for luxuries and semi-luxuries.

9. Expectations: If the people feel future shortage of commodity or rise in price, the demand will increase at present.

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|| Demand || Theory of Demand: desire, willingness and ability to pay for a commodity

Meaning of Demand


Demand is not the same as desire or need. Demand for a commodity means desire, willingness and ability to pay. For example, a poor man's desire and willingness to pay for a car is not demand since he does not have ability to pay. Similarly, a person's ability to pay for a car is not demand since he does not have willingness and desire to buy a car. The demand for any commodity is the desire for that commodity baked by willingness and ability to pay. Thus, demand means effective demand, in the sense of being able and willing to buy. Only this affects the volume of sales. 

According to Fredric 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."

In the words of Pappas and Brigham, "The term demand is defined as the number of units of particular goods or service that consumers are willing to purchase during a specific period and under a given set of conditions."

According to Milton H. Spencer, "Demand is the quantity that will be purchased of particular commodity at various prices, at a given time and place."

Thus, demand is always defined with reference to a particular time and given values of variables on which it depends. Two things should be noted in the definition:

First, demand always means demand per unit of time. The time period might be a month or year. We must specify the period for which the commodity is being demanded. The statement that demand for ghee in Kathmandu is 1000kg at Rs. 50 per kg, has no significance unless we state clearly the period for which this quantity is being demanded.

Second, the condition on which the things is demanded should be specified. The conditions would include the price of the good in question, price and availability of competitive goods, expectations of price changes, income, tastes and preference, advertising expenditures and so on. The demand for the product depends on all these factors. For example, the term demand has no significance unless it is related to price. The statement that the weekly demand for ghee in Kathmandu is 1000kg is meaningless unless we specify the price at which the quantity is being demanded by the customers of Kathmandu. The demand may be fairly small if the price is high.

Derivation of Individual and Market Demand Curve

The process of derivation of individual and market demand curve has been explained as follows:

Derivation of Individual Demand Curve


The individual demand schedule is a schedule of prices of commodity and the demand for the commodity made by an individual. Similarly, individual demand curve is the schedule of different quantities of goods demanded by an individual at different prices. The demand schedule shows the relationship between the prices of the commodity and the quantity demanded. The individual demand (for sugar) schedule has been presented in table below:

Individual Demand Schedule
Price ($ Per kg)Quantity Demanded (kg per month)
2
4
6
8
10
12
14 
10
7
5
3
2

As shown in the table, the quantity demanded of sugar at price $2 per kg is 14 kg, at $4 is 10kg, at $6 is 7kg, and so on. It shows that the quantity demanded increase with fall in price.

The individual demand curve is derived on the basis of this demand schedule. The individual demand curve DD has been derived in the following figure on the basis of above table.


In the given figure, OY axis represents price of sugar and OX axis represents quantity demanded DD is the demand curve. It shows that the quantity demanded is 14kg at price $2, 10kg at $4, 7kg at $6, 5kg at $8 and so on. In this way, the demand curve shows the relationship between price of the commodity and quantity demanded. According to R. G. Lipsey, "The demand curve for a commodity shows the relation between its price and a quantity a household wishes to purchase per period of time."

The demand curve has the following characteristics:
  • Traditionally, the price level is shown along the vertical axis and the quantity demanded is shown along the horizontal axis.
  • The demand curve may show the demand of an individual or the group of consumers in the market.
  • The demand curve assumes that there is no change in the value of other relevant variables. This means that the prices of other goods, income of the consumers and taste of consumers are assumed to be constant.
  • In general, the demand curve has negative slope, or the demand curve slopes downwards. This means that people demand more at lower prices.

The law of demand implies this. But there are two exceptions to this:
a) The situation of snob appeal – as for example, the expensive jewelry are demanded more at higher prices, but demanded less at lower prices due to the fall in snob appeal. 

b) The situation in which consumers judge quality by price – as for example, if the consumers do not have ability to judge the quality of the products directly, they use price as the quality. Hence, demand may fall when price falls.

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