Theory of Demand: What, Why, How, and How Much?

TAKEAWAYS:

• Demand is the quantity of a good or service consumers are willing and able to buy at different prices.
• The law of demand states that as price falls, quantity demanded rises (and vice versa).
• A demand curve shows this relationship graphically, always sloping downward.
• Factors like income, tastes, prices of substitutes, and expectations shift the demand curve.
• Market demand is the sum of all individual demands in a market.
• Understanding demand helps businesses set prices and governments design policies.

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1. What is Demand?

Demand refers to the quantity of a good or service that consumers are willing and able to buy at a given price during a specific time period.

Key Terms:

• Willingness to buy: Consumers want the product.
• Ability to buy: Consumers have enough money to purchase it.

Example:

If the price of a bottle of water is ₹20, a student might buy 5 bottles per week. But if the price drops to ₹10, they might buy 10 bottles. This shows how price affects demand.

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2. The Law of Demand

The law of demand states that:

"Other things being equal, as the price of a good falls, the quantity demanded of that good increases, and vice versa."

Why Does This Happen?

1. Substitution Effect: If the price of one good rises, consumers switch to cheaper alternatives.
   • Example: If the price of tea rises, more people buy coffee.
2. Income Effect: A lower price means consumers can buy more with the same income.
   • Example: If the price of rice falls, a family can buy more rice with the same budget.

Demand Schedule vs. Demand Curve

A demand schedule is a table showing how much of a good consumers will buy at different prices.

A demand curve is a graphical representation of the demand schedule.

Price (₹) | 100 | / | / | / | / |/ ----+--------> Quantity Demanded (units) 10 20 30 40

**Caption:** *A typical downward-sloping demand curve (price on Y-axis, quantity on X-axis).*

Why is the Demand Curve Downward-Sloping?

• Higher price → fewer buyers → lower quantity demanded.
• Lower price → more buyers → higher quantity demanded.

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3. Factors Affecting Demand (Shifters of the Demand Curve)

The law of demand assumes other factors remain constant. But if these change, the entire demand curve shifts (either left or right).

1. Consumer Income

• Normal Goods: Demand increases when income rises.
  • Example: Cars, smartphones.
• Inferior Goods: Demand decreases when income rises.
  • Example: Bus rides (people switch to cars).

2. Tastes and Preferences

• If a product becomes fashionable, demand rises.
  • Example: Yoga mats, fitness bands.
• If a product falls out of style, demand falls.

3. Prices of Related Goods

• Substitute Goods: Goods that can replace each other.
  • Example: Tea and coffee.
  • If tea price rises, demand for coffee increases (demand curve for coffee shifts right).
• Complementary Goods: Goods used together.
  • Example: Cars and petrol.
  • If car prices rise, demand for petrol falls (demand curve for petrol shifts left).

4. Future Expectations

• If consumers expect prices to rise in the future, they buy more now.
  • Example: Before Diwali, demand for fireworks increases.
• If they expect income to rise, they may delay purchases.

5. Number of Buyers

• More consumers → higher demand.
  • Example: A new movie releases, more people buy tickets.

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4. Market Demand vs. Individual Demand

• Individual Demand: Demand by a single consumer.
• Market Demand: Sum of all individual demands in a market.

Example:

If 5 students each demand 2 apples at ₹10, the market demand is 10 apples.

Market Demand Curve (Right-shifted) | 100 | / | / | / | / |/ ----+--------> Quantity (Market) 10 20 30 40

**Caption:** *Market demand is the horizontal sum of all individual demands.*

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5. Exceptions to the Law of Demand

While most goods follow the law, some do not:

1. Giffen Goods: Inferior goods where demand rises with price (rare).
   • Example: In poor countries, if rice prices rise, people buy more rice (even though it’s expensive) because they can’t afford better food.
2. Veblen Goods: Luxury goods where higher prices increase demand (snob effect).
   • Example: Designer bags, Rolex watches.
3. Speculative Demand: Demand for assets (like gold) based on future price expectations.

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6. Solved Example (NEB-Style)

Question: If the price of a pizza falls from ₹200 to ₹150, and the quantity demanded increases from 50 to 70 pizzas, calculate the change in quantity demanded and explain why this happens.

Solution:

1. Initial Quantity Demanded (Q₁): 50 pizzas at ₹200.
2. New Quantity Demanded (Q₂): 70 pizzas at ₹150.
3. Change in Quantity Demanded (ΔQ): 70 - 50 = 20 pizzas.
4. Reason: This follows the law of demand—as price falls, quantity demanded rises.

Graphical Representation: Price (₹) | 200 | / | / | / | / |/ ----+--------> Quantity (Pizzas) 50 70

**Caption:** *Demand curve shifts right as price decreases.*

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7. NEB Board-Style Questions (Practice)

Short Answer Questions (2-3 marks)

1. Explain the law of demand with an example.
2. What are the four main factors that shift the demand curve?
3. Why is the demand curve downward-sloping?

Long Answer Questions (5-7 marks)

4. Describe the difference between individual demand and market demand. Give an example.
5. Why do some goods violate the law of demand? Explain with two examples.
6. A student’s demand for notebooks changes when the price of pens rises. Explain using the concept of related goods.

Numerical Problem (5 marks)

7. Given the demand schedule below, draw the demand curve and explain the law of demand.

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8. Exam Tips

✅ Understand the Law of Demand: Always relate it to substitution and income effects. ✅ Memorize Demand Curve Shape: It’s always downward-sloping (except for Giffen/Veblen goods). ✅ Shifters Matter: Know the 5 factors that shift demand (income, tastes, substitutes, expectations, buyers). ✅ Graphs are Key: Always draw demand curves in answers—NEB loves them! ✅ Exceptions are Rare: Most goods follow the law, but know Giffen and Veblen goods for extra marks. ✅ Practice Numericals: Demand schedules and curve shifts are common in exams.

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Final Thought: Demand is the heart of economics—it tells businesses what to produce and governments how to regulate prices. Master this unit, and you’ll ace your NEB exam! 🚀