Demand -Definition

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Demand -Definition:

Demand -Definition The amount of a particular economic good or service that a consumer or group of consumers will want to purchase at a given price . The quantity of a good buyers wish to purchase at each conceivable price. The demand of a product refers to the amount of it which will be brought per unit of time at a particular price.

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Demand is the desire or want backed up by money. Demand =Desire + Ability to pay + Will to spend Demand is always relative to Price and Time Demand may be viewed Ex-Ante (Potential D) or Ex-post (actual amount purchased)

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Demand can be viewed at two levels Individual Level —demand for a commodity from the individual point of view. And Market Level ---The total demand of all buyers, taken together.

Determinants of Individual Demand:

Determinants of Individual Demand Price Tastes, Habits, Preferences Advertisement Effect Income Rel. prices of other goods—complementary and substitution products Consumer expectations

Determinants of Market Demand:

Determinants of Market Demand Distribution of Income and Wealth in Community # of Buyers and Population Growth Price Community Common Habits and Scale of Preferences Standard of Living and Spending Habits Age Structure and Sex Ratio of Population Future expectations Tax and Tax Structures Inventions and Innovations Fashion Climate and Weather Customs Advertisement and Sales Propaganda

Types of Demand:

Types of Demand Demand for Consumer’s and Producer’s Goods Demand for Perishable and Durable Goods Autonomous and Derived Demand Industry and Company Demand S-R Demand and L-R Demand Joint and Composite Demand Price f(P), Income f(M) and Cross Demand Dx=f(Py)

The Law Of Demand:

The Law Of Demand Stated by Alfred Marshall. Ceteris Paribus, the higher the price of a commodity, the smaller is the quantity demanded and lower the price, larger the quantity demanded. D=f(P) D-demand, p-price, f-functional relationship. Dx= f(Px)---Downward Sloping Demand Curve. Indicates inverse relation. D 5 D 4 2 3 400 300 200 100 1 500 Demand Price P of commodity X (in Rs.) Qt. Demanded (in units/week) 5 100 4 200 3 300 2 400 1 500


Assumptions No change in income No change in in Preferences No change in Fashion No change in price of related goods No expectation of future Price changes or shortages No change in size, age and Sex ratio of the population No change in range of goods available No change in Govt Policy No change in weather conditions

Exceptional Demand Curve (Upward Sloping Demand Curve):

Exceptional Demand Curve (Upward Sloping Demand Curve) Contrary to the Law of Demand, in some cases, with a fall in price, Demand also falls and a with a rise in price, demand also rises. Have upward sloping demand curve. Shows Direct functional relationship. Price Demand D D P1 P2 Q1 Q2

Few Exceptional Cases:

Few Exceptional Cases Giffen Goods (named after Robert Giffen) For inferior goods, when P increases, Qt. purchased decreases coz of the -ve income effect and people’s increasing preferences for a superior commodity with the increase in real income. Cheap Potatoes(good potatoes) Vegetable Ghee( Pure Ghee) Pucca rice (Basmati Rice) Articles of Snob Appeal Certain goods are demanded just coz they are expensive or prestige goods and have a snob appeal. Satisfy the aristocratic desire to preserve exclusiveness for unique goods. Purchased by fewer rich ad use as status symbol. Diamonds, Rolls Royce.

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Speculation When people speculate about changes in the price pf a commodity, they tend to buy more even at the existing high price for the purpose of hoarding. Shares in stock market. Consumer’s Psychological Bias or Illusion When a consumer is wrongly biased against the quality of a commodity with the price change, he may contract this demand with a fall in price. Stock clearance sale at reduced price.

Network Externalities in Market Demand:

Network Externalities in Market Demand Assumed Individual demand for the product are independent. Market demand function is the sum of all individual buyer’s demand. In reality, there may be interdependence of demand i.e. individual demand may be depending on the demands of the other people in case of some goods. This situation ‘Network Externality’, which may be +ve or –ve in effect. Bandwagon Effect Snob or Veblen Effect.

Bandwagon Effect:

Bandwagon Effect Demand for certain goods is on account of demonstration or bandwagon effect. D is influenced by the consumption of pace setters or trend setters like actors, models, group-leaders, etc. Price is minor consideration. DD – Initial Demand Curve OP Initial Price OQ- Initial Qt. Small fall in price (PP1) OP- New price OQ1 New Qt. demand on the same DD curve. QQ1 is Qt. Demanded in absence of BW effect on the fall in price. Q1Q2 is the Qt. demanded due to bandwagon effect. The demand curve shifts upwards at D1D1 suggesting rise in demand. Ex: Jeans, Barbie Dolls Use of modern media in advertising strategies are meant to produce the bandwagon effect to manipulate market demand. Q1 Quantity Price X Y e Q BW Effect D D Q2 D1 D1 b a P1 P O

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Koenigsegg CCX A bottle of Louis Roederer Cristal (1993)

The Snob Effect Or Veblen Effect:

The Snob Effect Or Veblen Effect The SE refers to the desire of a person (rich) to own exclusive or unique product is called Snob or Veblen good. Thorstein Veblen argued that affluent class demonstrate their superiority of high class by spending on frivolous goods and services. When P rises of these goods, D shifts upward. P falls, D shifts downwards. Network externality of snob effect is –ve as the luxury/snob good loses its snob effects/prestige when it is available freely. In such case even if P falls, D rises but individual demand of the snobbish buyer decreases.

Veblen Effect Paradox:

Veblen Effect Paradox In certain branded goods like Ray Ban or Levi’s product, there is a paradox. When having snob appeal, they are high in demand for the rich. large quantity production decreases P. Mass appeal to upper middle income groups, expanding demand. Hence no exclusivity. Demand decreases. Loss of appeal of branded goods-competition with unbranded goods Goods disposed off at huge discounts. P1- Qt is Q1 Lowered P2- Qt is Q2 Reduced P3.- Qt is Q3 Discounted P4- Qt is Q4 a b D Q4 Q3 Q2 Q1 P4 P3 P2 P1 Qt/month Price Discount D

Change in Qt. Demanded Versus Change in Demand :

Change in Qt. Demanded Versus Change in Demand Extension & Contraction of Demand Phrase ‘changes in Qt. demanded’ relates to the Law of demand- Changes in qt. on account of price change. A variation in demand implies extension or contraction of demand on the same demand curve. D extends when P falls (a to b) D contracts when P rises (a to c). D D P P2 Q Q1 P1 Q2 Price b a c Qt. Demanded

Change in Demand:

Change in Demand Contrary to Law of D, Increase or decrease in demand refers to changes in demand caused by the changes in various other determinants of demands, price remaining unchanged. Shifting the demand curve shows the increase or decrease in D. For a change in demand the changed in other factors other than price is responsible. Increase in D Decrease in D Price P P Q Q1 D D D1 D1 D D Q Q2 Price D2 D2 Demand Demand a b c a

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