Theory Of Demand | Detail Analysis


Demand means desire to have a commodity backed by the willingness and ability to pay for the commodity demanded. Preferences and choices are the basics of demand. Theory of Demand describes the way that changes in the quantity of a goods or service demanded by consumers affects its price in the market.

Economics is concerned with effective demand i.e. demand backed up by an adequate supply of purchasing power. Along with it, consumers must be willing to buy the commodity.

For instance, You have a desire to buy a car but do not have the money then, it is not an effective demand. If you have a desire and money to buy a car but at a certain point of time, you are not willing to pay for it due to the change in taste or preference, then also it is not qualified for an effective demand. You must have a desire, fund and willingness to buy a car to be called a demand.

Law of Demand

Law of Demand is one of the most fundamental concepts in economics. The “Law of Demand states that ceteris paribus. price and quantity of any goods and services are inversely related to each other.

As the price of a product falls, ceteris paribus, the demand for the product extends. Similarly, as the price of a product rises, ceteris paribus, the demand for the good contracts.

  • Ceteris Paribus : a Latin expression which means ‘other thing remaining equal’
  • Extend‘ and ‘Contract‘ denote the changes in the amount of demanded of a good as a consequence of the price change.

Demand Function: Qdx = f(Px) ceteris paribus , demand is function of price.

Assumption underlying the ‘Law of Demand’

  • No change in the income of consumers
  • No substitute for the goods
  • Price of related goods is stable
  • No change in custom. taste or preference of consumers
  • Size of population is stable
  • Tax rates are stable
  • Climate and weather conditions are as expected

Demand, Quantity Demanded, Demand Curve and Demand Schedule

Quantity demanded represents the number of goods that the consumers are willing to buy at a given price point. Demand simply represents all the available relationships between the goods prices and quantity demanded.

Price per unitQuantity Demand
Fig:1 Quantity Demanded at Rs.15 is 3
Price per unitDemand
Rs. 202
Rs. 251
Fig: 2 Relationship between prices and quantity demanded

Demand Schedule is a tabular representation which shows the quantity demanded of a good or service at different price level. Above Fig 2 is an illustration of demand schedule.

Demand Curve is a graphical representation of demand schedule i.e. representation of units of good demanded at various price level. The price is plotted on the y-axis (vertical) and quantity is plotted on x-axis (horizontal).

Demand Curve

Exception to the Law of Demand

Not all commodities follow the law of demand. Law of economics are not universal. Some commodities do not show an inverse relationship between the price and the quantity. Some of such exception;

  1. Giffen Goods

Giffen goods are inferior goods that lack close substitute and must form a large percentage of total consumption. Wheat and Rice are some examples of Giffen Goods.

Increase in price of rice and wheat, do not affect the quantity of the demand. In the contrary to law of demand, increase in price of Giffen goods increases the quantity demanded. This will lead to an upward sloping curve for Giffen goods.

2. Veblen Goods

Veblen Goods are certain type of luxury goods and such goods violates the law of demand. Luxury goods such as luxury cars, expensive wines, designer clothes etc. are veblen goods.

Consumers are willing to consume Veblen goods even if the price of such products increases.


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