Theory of Demand: Demand, Demand Schedule, Demand Curve, Factors Affecting Demand

TAKEAWAYS:

• Demand means the quantity of a good or service that buyers are willing and able to buy at a given price.
• A demand schedule is a table showing how much of a good is demanded at different prices.
• A demand curve is a graph showing the relationship between price and quantity demanded, sloping downward from left to right.
• The law of demand states that as price increases, quantity demanded decreases, and vice versa.
• Non-price factors like income, consumer preferences, prices of related goods, and expectations can shift the demand curve.
• Understanding demand helps businesses set prices and predict sales.

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What is Demand?

Demand is the willingness and ability of consumers to buy a good or service at a given price. It is not just about wanting something but also about having the money to buy it.

Key Points:

• Willingness: Consumers must desire the good.
• Ability: Consumers must have the money to purchase it.
• Demand is not the same as want or need. For example, you may want a smartphone, but if you don’t have money, it doesn’t count as demand.

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Demand Schedule

A demand schedule is a table that lists the quantities of a good that consumers are willing to buy at different prices. It helps us understand how demand changes with price.

Example:

Let’s take the demand for apples in a market.

From the table, we see that as the price of apples increases, the quantity demanded decreases.

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Demand Curve

A demand curve is a graphical representation of the demand schedule. It shows the relationship between price (on the y-axis) and quantity demanded (on the x-axis).

How to Draw a Demand Curve:

1. Plot the price on the vertical (y) axis.
2. Plot the quantity demanded on the horizontal (x) axis.
3. Connect the points with a straight line (or curve).

```figure
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Why Does the Demand Curve Slope Downward?

The demand curve slopes downward because of the law of demand. This law states that:

Other things being equal, when the price of a good rises, the quantity demanded of the good falls, and when the price falls, the quantity demanded rises.

Reasons for the Downward Slope:

• Substitution Effect: If the price of a good rises, consumers switch to cheaper alternatives.
• Income Effect: If the price rises, consumers feel poorer and buy less.
• Diminishing Marginal Utility: The more you consume of a good, the less satisfaction you get from each additional unit.

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Law of Demand

The law of demand is a fundamental principle in economics. It explains the inverse relationship between price and quantity demanded.

Example:

Imagine you sell ice cream in a park. If the price of ice cream is Rs. 50, you might sell 50 cones. But if you raise the price to Rs. 100, you might only sell 20 cones. This shows the law of demand in action.

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Movement Along the Demand Curve vs. Shift in Demand Curve

It’s important to distinguish between:

1. Movement along the demand curve: Caused by a change in the price of the good itself.
2. Shift in the demand curve: Caused by changes in non-price factors like income, tastes, or prices of related goods.

Visual Comparison:

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Factors Affecting Demand (Non-Price Factors)

The demand for a good can change due to factors other than its own price. These factors cause the entire demand curve to shift (either left or right).

1. Income of Consumers

• Normal Goods: As income increases, demand increases (e.g., cars, electronics).
• Inferior Goods: As income increases, demand decreases (e.g., second-hand clothes).

2. Consumer Preferences (Tastes)

• If consumers like a product more (e.g., a new trend), demand increases.
• If consumers dislike it (e.g., health concerns), demand decreases.

3. Prices of Related Goods

• Substitute Goods: If the price of a substitute rises, demand for the original good increases (e.g., tea and coffee).
• Complementary Goods: If the price of a complement rises, demand for the original good decreases (e.g., cars and petrol).

4. Expectations of Future Prices

• If consumers expect prices to rise in the future, they may buy more now, increasing demand.
• If they expect prices to fall, they may wait, decreasing current demand.

5. Number of Buyers

• More buyers in the market increase demand.
• Fewer buyers decrease demand.

6. Government Policies

• Subsidies increase demand.
• Taxes decrease demand.

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Individual Demand vs. Market Demand

• Individual Demand: The demand of a single consumer.
• Market Demand: The sum of all individual demands in the market.

Example:

If 5 people each demand 10 kg of rice at Rs. 50, the market demand is 50 kg at Rs. 50.

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Solved Example: Demand Schedule and Curve

Question: Given the following demand schedule for pens, draw the demand curve.

Solution:

1. Plot the points on a graph:
   • (10, 100), (20, 80), (30, 60), (40, 40), (50, 20).
2. Connect the points to form a downward-sloping demand curve.

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NEB Board-Style Questions and Answers

Question 1: Short Answer

What is demand? Explain the law of demand with an example.

Answer: Demand is the quantity of a good or service that consumers are willing and able to buy at a given price.

The law of demand states that as the price of a good increases, the quantity demanded decreases, and vice versa.

Example: If the price of a movie ticket increases from Rs. 200 to Rs. 300, fewer people will buy tickets. This shows the law of demand in action.

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Question 2: Short Answer

Distinguish between movement along the demand curve and shift in the demand curve.

Answer:

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Question 3: Long Answer

Explain the factors affecting demand with examples.

Answer: Demand is affected by several factors besides price. These factors cause the demand curve to shift.

1. Income:

   • Normal Goods: If income rises, demand for normal goods (e.g., smartphones) increases.
   • Inferior Goods: If income rises, demand for inferior goods (e.g., second-hand clothes) decreases.

2. Consumer Preferences:

   • If a product becomes trendy (e.g., a new fashion brand), demand increases.
   • If health concerns arise (e.g., sugary drinks), demand may decrease.

3. Prices of Related Goods:

   • Substitutes: If the price of tea rises, demand for coffee (a substitute) increases.
   • Complements: If the price of cars rises, demand for petrol (a complement) decreases.

4. Future Price Expectations:

   • If consumers expect prices to rise, they buy more now (e.g., buying gold before Diwali).
   • If they expect prices to fall, they wait (e.g., waiting for smartphone discounts).

5. Number of Buyers:

   • More buyers (e.g., population growth) increase demand.
   • Fewer buyers (e.g., migration) decrease demand.

6. Government Policies:

   • Subsidies (e.g., on fertilizers) increase demand.
   • Taxes (e.g., on cigarettes) decrease demand.

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Exam Tip

1. Understand the Difference: Always distinguish between movement along the demand curve (price change) and shift in the demand curve (non-price factors).
2. Draw Graphs: Practice drawing demand curves and labeling shifts correctly.
3. Use Examples: NEB often asks for real-life examples. Be ready to explain demand changes in everyday situations (e.g., festivals, price hikes).
4. Memorize Key Terms: Know definitions like law of demand, substitute goods, and complementary goods.
5. Apply to Market Demand: Remember that market demand is the sum of individual demands.

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