THEORY OF DEMAND: Definition, determinants, law of demand, exception of law of demand, expansion and contraction of demand, increase and decrease in demand

The concept demand refers to the quantity of a good or service that consumers are willing and able to purchase at various prices during a given period of time.

Determinants of demand

1. Price of the commodity

Generally with increase in the  price of a commodity consumer tends to demand lesser units and with decrease in the price of commodity consumer tends to demand greater units of a commodity. Therefore the demand of is inversely related to its price.

2. Price of related goods 

They are of two types: 

(a) Substitute goods- 

      When two commodities can be used in         place of one another with ease are               called substitute goods. Increase in             price of one substitute good results in         increase demand of other substitute.

       There is a direct or positive relation             between the demand for a product               and the price of its substitutes.                     Example: tea and coffee, ink pen and             ball pen, etc. 

(b) Complementary goods-

      Complimentary goods are those goods which are consumed together or simultaneously. Fall in price of one goods results in rise demand for the other goods. There is an inverse relationship between demand for the product and price of its compliment. Example- bike petrol, phn and charger, etc.

3. Income of the consumer

The demand of a commodity depends upon the money income of the consumer. The purchasing power of the consumer is determined by the level of his income. The larger the average money income of the consumer, the larger is the quantity demanded of a particular good. 

Some commodities for which the quantity demanded rises only up to a certain level of income and decrease with increase in money income beyond this level are called inferior goods. Demand for luxury goods and prestigious goods arise beyond a certain level of income and keep rising as income increases.

4. Taste and preference of consumer

Taste and preference also affect the demand of a commodity to a great extent. Consumer demand greater units of those commodity which are liked by him. Goods which are modern or more in fashion command higher demand than goods which are of old design and out of fashion. For example jeans are more in demand because youngsters like jeans more.

5. Consumer's expectations

If the consumer expect increase in future prices, increase in income and shortages in supply, more quantities will be demanded. If they expect a fall in price they will postpone their purchases of nonessential commodities and therefore, the current demand for them will fall.

LAW OF DEMAND

Law of demand explains the consumer behaviour i.e. the law explains the relationship between price and quantity demanded. 

According to law of demand, other things being equal, if the price of a commodity falls, the consumer tends to demand greater units and if the price of a commodity rises, the consumer tends to demand lesser units. 

There is an inverse relationship between price and quantity demanded.

Exception to the law of demand

1. Griffin good

Griffin goods is a product that consumers consumes more as the price rise and less as the price fall violating the basis rule of law of demand. For any other sort of good, as the price of good rises the substitution effect makes consumer to purchase less of it. But Griffin good is so strongly inferior goods in the minds of consumer  that this contrary income effect more than offsets the substitution effect, and the net effect of the good's price rise is to increase demand for it. A Griffin good is considered to be the opposite of ordinary goods.

2. Conspicuous goods

Articles of prestige value or snob appeal or article of conspicuous consumption are demanded only by the rich people and these articles become more attractive if their prices go up. Such articles will not confirm to the usual law of demand.

For example luxury goods, prestigious goods, status symbol goods, etc.

3. Conspicuous necessities

The demand for certain goods is affected by the demonstration effect of the consumption pattern of a social group to which an individual belongs. These goods due to their constant usage, become necessities of life. 

For example T.V. sets, refrigerators, coolers, cooking gas, etc.

4. Future expectations about price

It has been observed that when the prices are rising, households expecting that the prices in future will be still higher, tend to buy larger quantities of such commodities.

5. Necessaries

The law of demand does not apply much in the case of necessaries of life. Irrespective of price change, people have to consume the minimum quantities of necessary commodities.

For example food, power, water, gas, etc.

6. Speculative goods

In the speculative market, particularly in the market for stock and shares, more will be demanded when the prices are rising and less will be demanded when price decline.

EXPANSION AND CONTRACTION OF DEMAND

Expansion of demand is the downward movement on the demand curve caused due to decrease in price and increase in the quantity demanded of a commodity other things being constant where as contraction of demand is the upward movement on the demand curve caused due to increase in price and decrease in the quantity demanded of a commodity other things being constant. 

INCREASE AND DECREASE IN DEMAND

Increase in demand is the rightward shift of the demand curve caused when quantity demanded of a commodity rises due to change in factors other than price where as decrease in demand is the leftward shift of the demand curve caused when quantity demanded of a commodity falls due to change in factors other than price.