Demand¶
optimal quantity of commodities which consumers are willing and able to buy at a particular price, in a particular period
if prices change, demand also changes
Law of Demand¶
Assuming every factor (like preferences, current state affairs) remains constant
Causes - Income effect: +ve/-ve - Substitution effect/compensated demand: always -ve
| Type of good | Price | Substitution effect | Income effect | Total effect |
|---|---|---|---|---|
| Normal | Inc | -ve | -ve | -ve |
| Dec | +ve | +ve | +ve | |
| Inferior | Inc | -ve | +ve | depends |
| Dec | +ve | -ve | depends |
Individual Demand Curve¶
Shows the relationship between price and quantity demanded
Can vary from one individual to another even for the same commodity, due to Factors of Trade
graph is a straight line with a negative slope
- x = Demand
- y = price
Be careful of the slope, cuz the slope formula is for the inversed graph of the demand Curve Slope \(= \frac 1 {\alpha_2}\)
| Term | Meaning |
|---|---|
| \(x\) | Demand |
| \(P\) | Price |
| \(\alpha_2\) | Sensitivity of demand wrt price The no of units of demand decreases by when the price increases by 1 unit - Necessities have low sensitivity - Luxury goods have high sensitivity |
| \(\alpha_1\) | Demand even when commodity is free Captures impact of all other factors that affect the demand (Income of consumers, advertising, etc) |
Change in Price¶
| Normal Good | Inferior Good |
|---|---|
 |  |
Graph Characteristics¶
| Horizontal Graph | Vertical Graph | |
|---|---|---|
| Slope of graph | \(\to 0\) | \(\to \infty\) |
| \(\alpha_2\) | \(\to \infty\) | \(\to 0\) |
| sensitivity | High | Low |
| even a small change in price will cause variation in demand | even large changes in price cause negligible change in demand | |
| Example | when there are too many sellers and buyers; and only one seller changes the price | medicines, food |
Market Demand¶
total demand for a commodity in a market at a particular price
summation of individual demands for commodity at particular prices
Giffen Goods¶
Law of demand not applicable for them
eg: BW TVs, Nokia Phone
\(\text{demand} \propto \text{price}\)
Factors of Demand¶
Out of the following factors, economic policies mainly target the expectations factor
Income and Wealth¶
More income and wealth means more spending and hence, higher demand
- Income is flow of money currently
- Wealth is what we have accumulated over time
| Relationship Type | Elastic Demand? | Shift in individual demand curve | Consumption at same price | Example |
|---|---|---|---|---|
| +ve | ✅ | Rightward | Greater | Luxury Items |
| Neutral | ❌ | None | Same | Staple foods |
| -ve | ✅ | Leftward | Lower | Inferior and Giffen goods |
Types of Goods based on Income Elasticity¶
| Type | Income Elasticity | |
|---|---|---|
| Superior | +ve | Smartphones, LED TVs, Cars |
| Necessities | 0 | Staple foods |
| Inferior | -ve | B/W TV, tungsten bulbs, public transport |
Price of Other goods¶
Cross Price is measured by \(\alpha_3\)
when price of complimentary good increases, the demand of main commodity decreases when price of substitute good increases, the demand of main commodity increases
hence, if
- \(\alpha_3 > 0\) substitute
- \(\alpha_3 < 0\) complimentary
Types of Goods based on substitution¶
| Type | Meaning | Example |
|---|---|---|
| Complimentary goods | Goods that are consumed together | Car & Petrol |
| Substitute Goods | Goods that are alternatives of each other | Pepsi & Coke |
Tastes/Preferences¶
idk how to write this
Customer Expectations¶
| Expectation | Meaning | Explanation |
|---|---|---|
| Expected Price | What I predict to be the price of the commodity in the future | If expected price > current price, then demand increases, which ends up increasing the price; whether or not it would’ve happened naturally, nobody will know 😆; here, our expectations clearly affects the actual outcome If expected price < current price, then demand decreases |
| Expected | What I predict to be my income in the future |
Market Size¶
No of buyers in the market
Advertising Expenditure¶
Does not affect the product, but changes the perception of the product in consumers’ heads
Season/Time of the Year¶
- demand for cotton is greater in summer
- demand for wool is greater in winter