Demand theory forms the core of microeconomics and concerns the relationship between the demand for goods and their prices. Demand is based on needs, wants, and effective demand, and is depicted through demand schedules and curves that show an inverse relationship between price and quantity demanded. The theory was developed by economists like Walras, Marshall, and Pareto and shows that demand is influenced by factors like income, tastes, prices of substitutes and complements, and population. Exceptions to the law of demand include Veblen goods and speculative demand. Demand can experience shocks that impact aggregate productivity and the overall economy.

1. Theory of Demand
Presented by :
Ashutosh Mishra
MBA- Ist. Semester
If necessity is the mother
of invention, then demand
is the mother of
production.

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3. Leon Walras (1834-1910) a French economist,
gave demand theory as a fundamental principle
of microeconomics which gives the analysis of
the relationship between the demand for goods
or services and prices or incomes.
The theory was subsequently developed by
English economist Alfred Marshall (1842-1924),
Italian Vilfredo Pareto (1848-1923), Soviet Eugen
Slutsky (1880-1948), American Kenneth Arrow
(1921- ) and the French-born Gerard Debreu
(1921- ).
-economyprofessor.com
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4. Demand is the basis of all productive activities.
Demand theory is an economic theory that
concerns the relationship between the demand for
goods and their prices; it forms the core of
microeconomics.
The generation of demand can be pictorially shown
as below,
NEED WANT DEMAND
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5. Concept of effective demand
Want Demand
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6. Demand
Law of Demand Hedonic theory
The law of demand is
normally depicted as
an inverse relation of
quantity demanded
and price: the higher
the price of the
product, the less the
consumer will
demand, ceteris
paribus ("all other
things being equal").
It is an economic
theory that the price
an individual will pay
for a good reflects the
sum of the
characteristics of that
good.
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7. Demand Schedule: A demand schedule is a tabular presentation of
the amount of goods consumers are willing and able to buy at
different level of prices over a given period of time.
Demand Curve: The graphical representation of demand schedule is
the demand curve. The demand curve is a downward sloping curve
from left to right. This characteristic of the demand curve is due to
the inverse relationship between price and quantity demanded.
Price per
cassette Rs.
A
B
C
D
E
A Demand Table
DVD rentals
demanded per
week
0.50
1.00
2.00
3.00
4.00
9
8
6
4
2
PriceperDVDs(inrupees)
E
D
C
B
A
G
1 2 3 4 5 6 7 8 9 10
Quantity of DVDs demanded (per week)
Demand
for DVDs
6.00
A Demand Curve
5.00
4.00
3.50
3.00
2.00
1.00
.50
F
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Reasons behind Demand
The Income Effect: There is an income effect when the
price of a good falls because the consumer can maintain
current consumption for less expenditure.
The Substitution Effect: There is also a substitution
effect when the price of a good falls because the
product is now relatively cheaper than an alternative
item and so some consumers switch their spending
from the good in competitive demand to this product.

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Conditions of Demand
The conditions of demand for a product in a market can be
summarized as follows:
D = f (Pn, Pn…Pn-1, Y, T, P, E)
Where:
Pn = Price of the good itself
Pn…Pn-1 = Prices of other goods – e.g. prices of Substitutes and
Complements
Y = Consumer incomes – including both the level and distribution
of income
T = Tastes and preferences of consumers
P = The level and age-structure of the population
E = Price expectations of consumers for future time periods

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Exceptions to the Law of Demand
ostentatious consumption effects of speculative demand
The demand for the
product is a direct
function of its price. It
comprises of luxury
items. They are called
Veblen goods.
Eg. Expensive perfumes,
designer clothes etc.
The potential buyers are
interested not just in the
satisfaction they may get
from consuming the
product, but also the
potential rise in market
price leading to a capital
gain or profit.
Eg. Housing & shares etc.

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Integrability & Aggregation in Theory of Demand
Harold Hotelling believed that integrability was a necessary
characteristic of both individual and market demand
equations, and he demonstrated that it would hold if
consumers did not have a budget constraint. If there was a
budget constraint, he contended, the usual integrability
condition would be replaced by a condition which assures
that an integrating factor can be introduced.
Aggregation by summation of individual demands is
considered, and it is shown that this form of aggregation
is valid if there is a budget constraint only when income
effects are the same for all individuals.

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Demand Shocks
A model of business cycles driven by shocks to consumer
expectations regarding aggregate productivity. Agents are hit by
heterogeneous productivity shocks, they observe their own
productivity and a noisy public signal regarding aggregate
productivity.
A calibrated version of the model is able to generate realistic
amounts of short-run volatility due to demand shocks, in line with
existing time-series evidence.
Guido Lorenzoni
MIT Department of Economics
E52-251C
50 Memorial Drive
Cambridge, MA 02142 and NBER.

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MASSIVE DROP IN U.S. DEMAND IN APRIL
U.S. oil demand in April was 863,000 barrels per day less than
previously estimated and down 811,000 bpd from a year earlier,
putting petroleum consumption at the lowest level for any April
month in six years, the Energy Information Administration said
on Monday.
The lower oil demand was due to rising fuel prices and a
faltering U.S. economy that has cut into petroleum use.
The size of this drop (down 811,000bpd, year-on-year) is
massive. Indeed it's almost enough to wipe out total worldwide
growth in oil consumption from 2006 to 2007 (990,000bpd,
according to the BP Statistical Review 2008).
Monday, June 30, 2008-Reuters
Washington

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It is enough to wipe out two years worth of consumption
growth from China.

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The benefits a person gets from a product depend on his
goals.
These goals are referred to in many ways in discussions of
demand.
The words "tastes," "wants," "needs," "preferences" and
"usefulness"
all refer to goals. When people's goals change, the amount
of benefit
they get from the good changes, and this will cause them
to change
the amount of the good they want to buy.

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It differs from being to being !

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Thank
You !