Page 19 - DECO101_MICRO_ECONOMICS_ENGLISH

Micro Economics

Notes Demand for a commodity refers to the quantity of the commodity which an individual household
is willing and able to purchase per unit of time at a particular price.
Demand for a commodity implies:
1. Desire to acquire it,
2. Willingness to pay for it, and

3. Ability to pay for it.
Demand has a specific meaning. As stated earlier, mere desire to buy a product is not demand.

Example: A miser’s desire for and his ability to pay for a car is not demand because
he does not have the necessary will to pay for it. Similarly, a poor man’s desire for and his
willingness to pay for a car is not demand because he does not have the necessary ability to pay
(purchasing power).

One can also think of a person who has both the will and purchasing power to pay for a commodity,
yet this is not demand for that commodity if he does not have desire to have that commodity.
Demand for a commodity has to be stated with reference to time, its price and that of related
commodities, consumer’s income and taste, etc. Demand varies with changes in these factors.

Example: As demand for sweets go up, the demand for sugar also goes up Or as your
income increases, you demand for branded clothes also goes up.
2.1.1 Determinants of Demand

The demand for a commodity arises from the consumer’s willingness and ability to purchase the
commodity. The demand theory says that the quantity demanded of a commodity is a function
of or depends on not only the price of a commodity, but also on income of the person, price of
related goods – both substitutes and complements – tastes of consumer, price expectation and all

other factors. Demand function is a comprehensive formulation which specifies the factors that

influence the demand for the product.
D = f(P , P , P , B, A, E, T, U)
x x y z
Where, D = Demand for item x
x
P = Price of item x
x
P = Price of substitutes
y
P = Price of complements
z
B = Income of consumer
E = Price expectation of the user

A = Advertisement expenditure
T = Taste or preference of user
U = All other factors
The impact of these determinants on demand is:
1. Price effect on demand: Demand for x is inversely related to its own price.
This can be shown as:
1
D ∝
x
P x

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