This document discusses demand theory and the factors that influence demand. It defines demand as the quantity of a good that consumers are willing and able to purchase at a given price. The key points are: 1) Demand depends on a good's utility and consumers' ability to pay. It relates inversely to price - as price rises, demand falls, and vice versa. 2) The demand curve graphs this inverse relationship, with a downward slope. A change in demand results from non-price factors like income, tastes, or preferences. 3) Equilibrium occurs when supply equals demand. Prices adjust upwards when demand exceeds supply, and downwards when supply exceeds demand.

1. THEORY OF DEMAND
Umamaheswari Gopal

2. Demand definition
 No fundamental social change occurs merely because
government acts. It's because civil society, the conscience of
a country, begins to rise up and demand - demand - demand
change.
-Joe Biden

3. Demand theory
 Demand theory is a principle relating to the relationship
between consumer demand for goods and services and their
prices.
 Demand theory forms the basis for the demand curve, which
relates consumer desire to the amount of goods available.
 As more of a good or service is available, demand drops and
so does the equilibrium price.

4. Demand definition
 Demand is the quantity of a good or service that consumers are
willing and able to buy at a given price in a given time period.
People demand goods and services in an economy to satisfy their
wants, such as food, healthcare, clothing, entertainment, shelter,
etc.
 The demand for a product at a certain price reflects the
satisfaction that an individual expects from consuming the
product. This level of satisfaction is referred to as utility and it
differs from consumer to consumer.
 The demand for a good or service depends on two factors:
 (1) its utility to satisfy a want or need, and
 (2) the consumer’s ability to pay for the good or service.
 In effect, real demand is when the readiness to satisfy a want is
backed up by the individual’s ability and willingness to pay.

5. Concept of equilibrium
 Built into demand are factors such as consumer preferences,
tastes, choices, etc.
 Evaluating demand in an economy is, therefore, one of the most
important decision-making variables that a business must analyze
if it is to survive and grow in a competitive market.
 The market system is governed by the laws of supply and
demand, which determine the prices of goods and services. When
supply equals demand, prices are said to be in a state
of equilibrium.
 When demand is higher than supply, prices increase to
reflect scarcity.
 Conversely, when demand is lower than supply, prices fall due to
the surplus.

6. The law of demand
 The law of demand introduces an inverse relationship between
price and demand for a good or service.
 It simply states that as the price of a commodity increases,
demand decreases, provided other factors remain constant.
Also, as the price decreases, demand increases.
 This relationship can be illustrated graphically using a tool
known as the demand curve.

7. Demand curve
 The demand curve has a negative slope as it charts downward
from left to right to reflect the inverse relationship between the
price of an item and the quantity demanded over a period of
time. An expansion or contraction of demand occurs as a result
of the income effect or substitution effect.
 When the price of a commodity falls, an individual can get the
same level of satisfaction for less expenditure, provided it’s
a normal good.
 In this case, the consumer can purchase more of the goods on a
given budget. This is the income effect. The substitution effect is
observed when consumers switch from more costly goods to
substitutes that have fallen in price.
 As more people buy the good with the lower price, demand
increases.

8. Preference
 Sometimes, consumers buy more or less of a good or service
due to factors other than price. This is referred to as a change
in demand. A change in demand refers to a shift in the
demand curve to the right or left following a change in
consumers’ preferences, taste, income, etc.
For example, a consumer who receives an income raise at work
will have more disposable income to spend on goods in the
markets, regardless of whether prices fall, leading to a shift to
the right of the demand curve.

9. Giffen goods
 The law of demand is violated when dealing with Giffen or
inferior goods. Giffen goods are inferior goods that people
consume more of as prices rise, and vice versa. Since a Giffen
good does not have easily available substitutes, the income
effect dominates the substitution effect.

10. Concept of microeconomics
 Demand theory is one of the core theories of microeconomics.
It aims to answer basic questions about how badly people
want things, and how demand is impacted by income levels
and satisfaction (utility). Based on the perceived utility of
goods and services by consumers, companies adjust the
supply available and the prices charged

11. Demand curve
 A demand curve, shown in red and shifting to the right,
demonstrating the inverse relationship between price and
quantity demanded (the curve slopes downwards from left to
right; higher prices reduce the quantity demanded). :::::> This
is not true, as shown on the graph where a higher price (P1 ->
P2) results in a greater quantity demanded (Q1 -> Q2). A shift
of the demand curve does not result from a change in price; it
results from a change in demand. What should be shown is
movement ALONG the demand curve (D1) to a higher price
point, which will result in a smaller quantity demanded.

12. Diagram

13. Direct demand
 Demand is the quantity of good and services that customers
are willing and able to purchase during a specified period
under a given set of economic conditions. The period here
could be an hour, a day, a month, or a year. The conditions to
be considered include the price of good, consumer’s income,
the price of the related goods, consumer’s preferences,
advertising expenditures and so on. The amount of the
product that the customers are willing to buy, or the demand,
depends on these factors. There are two types of demand.
The first of these is called direct demand.

14. Derived demand
 This model of demand analysis individual demand for goods
and services that directly satisfy consumers desires. The prime
determinant of direct demand is the utility gained by
consumption of goods and services. Consumers budget,
product characteristics, individuals preferences are all
important determinants of direct demand. The other type of
demand is called derived demand.
 Derived demand is the demand resulting from the need to
provide the final goods and services to the consumers.
Intermediate goods, office machines are examples of derived
demand. An other good example is mortgage credit. Mortgage
credit demand is not demanded directly, but derived from the
demand for housing.

15. Market demand function
 The market demand function for a product is a function
showing the relation between the quantity demanded and the
factors affecting the quantity of demand. A demand function
for the good X can be expressed as follows: Quantity of
product X demanded = Qx = f (the price of X, prices of related
goods, expectations of price changes, income, preferences,
advertising expenditures and so on. ) For use in managerial
decision making, the relation between quantity of demand and
each demand determining variable must be specified.

16. Demand Curve
 Demand Curve The demand function specifies the relation
between the quantity demanded and all factors that determine
demand. But the demand curve expresses the relation
between the price of a product and the quantity demanded,
holding constant all the other factors affecting demand.