Page 26 - DECO405_MANAGERIAL_ECONOMICS

Unit 2: Market Demand

T = Taste or preference of user Notes
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

This shows that demand for x is inversely proportional to price of x. This means – as price
of x increases, the quantity demanded of x falls.
2. Substitution effect on demand: If y is a substitute of x, then as price of y increases, demand
for x also increases.

Example: Tea and coffee, cold drinks and juice etc. are substitutes.
This can be shown as:

D x P y
This shows that the demand for x is directly proportional to price of substitute commodity
y. This means -demand for x and price of substitute commodity y are directly related.
3. Complementary effect on demand: If z is a complement of x, then as the price of z falls, the
demand for z goes up and thus the demand for x also tends to rise.

Example: Ink and pen, bread and butter etc. are complements.
This can be shown as:

1
D x
P
z
This shows that the demand for x is inversely proportional to the price of complementary
commodity z. This means – demand for x and price for complementary commodity y are
inversely directly related.
4. Price expectation effect on demand: Here the relation may not be definite as the psychology
of the consumer comes into play. Your expectations of a price increase might be different
from your friends’.
5. Income effect on demand: As income rises, consumers buy more of normal goods (positive
effect) and less of inferior goods (negative effect). Examples of normal goods are t-shirts,
tea, sugar, noodles, watches etc. and examples of inferior goods are low quality rice,
jowar, second hand goods etc.
This can be shown as:
D B, if X is a normal good.
x
And,

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D x , if X is an inferior good.
B

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