The demand for a commodity is the amount of it that a consumer will purchase or will be ready to take off from the market at various given prices during a specified time period. This time period may be a day, a week, a month, a year or any given time period. This demand in economics implies both the desire to purchase and the ability to pay for a good. It is noteworthy that mere desire for a commodity does not constitute demand for it, if it is not backed by the ability to pay. For example, if a poor man who hardly makes both ends meet wishes to have a car, his wish or desire for a car will not constitute the demand for the car because he cannot afford to pay for it, that is, he has no purchasing power to make his wish or desire effective in the market.
In other words: - An economic principle that describes a consumer's desire and willingness to pay a price for a specific good or service. Holding all other factors constant, the price of a good or service increases as its demand increases and vice versa.
Law of Demand: - According to the law of demand other things being equal, if the price of a commodity falls, the quantity demanded of it will rise, and if the price of the commodity rises, its quantity demanded will decline. Thus, according to the law of demand, there is inverse relationship between price and quantity demanded, other things remaining the same. These other things which are assumed to be constant are the tastes and preferences of the consumer, the income of the consumer, and the prices of related goods. If these other factors which determine demand also undergo a change, then the inverse price-demand relationship may not hold good. Thus, the constancy of these other things is an important qualification of the law of demand.
We explained above that when price falls the quantity demanded of a commodity rises and when price rises then quantity demanded of a commodity falls, other things remaining the same. It is due to this law of demand that demand curve slopes downward to the right. Now, the important question is why the demand curve slopes downward, or in other words, why the law of demand which describe inverse price-demand relationship in valid. We can prove this with marginal utility analysis. It may however be mentioned here that there are two factors due to which quantity demanded increases when price falls: (1) Income Effect, (2) Substitution Effect.
Law at Diminishing Marginal Utility: - A consumer demands a commodity because it has utility. As he consumes more and more units of a commodity, in a given time, the utility derived from each successive unit goes on diminishing. In other words, Law of diminishing marginal utility applies to his consumption. Law of diminishing marginal utility refers to the phenomenon whereby the marginal utility of any good diminishes as more and more of that good is purchased. Marginal utility is the addition made to total utility by consuming one more unit of commodity. Obviously, A consumer will buy an additional unit of a commodity only if he him to pay less price for it compared to the previous unit. A consumer will stop his purchase at that point where the marginal utility of the commodity is equal to the price paid for it. Thus,
Price = Marginal utility
Relationship
between the law of demand and law of diminishing marginal utility is explained
with the help of following schedule:-
Utility
schedule
Units
of Ice cream
|
Marginal
utility
(measure
in term of rupees)
|
1
|
8
|
2
|
6
|
3
|
4
|
4
|
2
|
If price of
ice-cream is Rs. 4 per unit, the consumer will buy 3 units corresponding to the
equality between ‘marginal utility’ and ‘price’. Likewise, if the price becomes
Rs 6 per unit, 2 units of ice-cream will be purchased so that marginal utility
and price are equal to each other. Thus, corresponding to rise in the price
from Rs 4 to Rs 6 per unit, demand for ice cream contracts from 3 to 2 units,
establishing an inverse relationship between price of the commodity and its
quantity demanded. Law of diminishing marginal utility thus is the basis of the
law of demand.
Income Effect: - When
the price of a commodity falls, the consumer can buy more quantity of the
commodity with his given income. In other words, as a result of the fall in the
price of a commodity, consumer’s real income or purchasing power increases. This
increase in real income induce the consumer to buy more of that commodity. This
is called Income Effect. This is one reason why a consumer buys more of a
commodity whose price falls.
Substitution Effect: -
The other important reason why the quantity demanded of a commodity rises as
its price falls is the substitution effect. When the price of a commodity
falls, it becomes relatively cheaper than other commodities. This induces the
consumer to substitute the commodity whose price has fallen for other commodities
which have now become relatively dearer.
Extension of Demand: - Extension of demand is a rise in demand due to fall in price when other things remain equal. It is represented by movement from a higher point to a lower point along the some demand curve.
Contraction of Demand: - Other things being equal, contraction of demand is a fall in the demand due to rise in price. It is represented by a movement from a lower point to a higher point along the same demand curve.
Increase In Demand: - Increase in demand means rise in demand due to change in factors other than the price of the commodity. It is represented by an upward shift of the demand curve.
Decrease in Demand: - Decrease in demand means fall in demand due to change in factors other than the price of the commodity. It is represented by a downward shift of the demand curve.
Extension of Demand: - Extension of demand is a rise in demand due to fall in price when other things remain equal. It is represented by movement from a higher point to a lower point along the some demand curve.
Contraction of Demand: - Other things being equal, contraction of demand is a fall in the demand due to rise in price. It is represented by a movement from a lower point to a higher point along the same demand curve.
Increase In Demand: - Increase in demand means rise in demand due to change in factors other than the price of the commodity. It is represented by an upward shift of the demand curve.
Decrease in Demand: - Decrease in demand means fall in demand due to change in factors other than the price of the commodity. It is represented by a downward shift of the demand curve.
Causes of Increase
in Demand
1. When
income of the consumer increases.
2. When
price of substitute good increases.
3. When price of complementary good falls.
4. When taste of the consumer shifts in favour of the
commodity due to change in fashion or climate.
5. When number of consumers increases.
6. Expected increase in income in the near future.
7. When price of the commodity is expected to Increase in
the near future
Causes of Decrease
in Demand
1.
When income of the consumer falls.
2.
When price of the substitute goods decreases.
3.
When price of the complementary good increases.
4.
When taste of the consumer shifts against the commodity
due to change in fashion or climate.
5.
Decrease in number of consumers.
6.
When price of the commodity is expected to
decrease in the near future.
7.
Expected reduction in income in near future.
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