Demand

Why are vegetables dearer in the morning and cheaper in the evening? Why does the same flight seat cost ₹3,000 one day and ₹9,000 another? Why do shops hold sales at certain times of year? Prices do not change at random. They react to what people want, how much is available, seasons, festivals, fashions, and sometimes even rumours. Behind it all are two forces: demand and supply.

Think of the mango season. At the start, mangoes are dear, so people buy only a few. As the season goes on and prices fall, people buy more. We will follow this one mango story through the whole chapter.

Demand (maang) is the quantity of a product people are willing and able to buy at a particular price. Watch out: wanting a thing is not demand. Dreaming about an expensive car is not demand until you can actually pay for it. Demand = desire + ability to pay (purchasing power).

"What is purchasing power?" How much your money can buy. One small sum: with ₹500, at ₹100 a kg you can buy 5 kg of apples. If the price rises to ₹125 a kg, the same ₹500 buys only 4 kg. Your purchasing power has fallen.

The Law of Demand: when the price rises, the quantity demanded falls; when the price falls, the quantity demanded rises. Price and quantity demanded move in opposite directions: an inverse relationship.

Srivalli's mangoes (p.196). At the start of the season, at ₹150 a kg, she buys 1 kg. Later, at ₹100, she buys 2 kg. At ₹50, she buys 3 kg. This table is her demand schedule. Drawn on a graph, with price on the y-axis and quantity on the x-axis, the points join into a downward-sloping demand curve, DD' (Fig. 9.2). This assumes other things, like her income and taste, stay the same.

Market demand is the demand of all buyers added together (Table 9.1):

The market curve is flatter: when the price falls from ₹150 to ₹50, Srivalli buys 2 kg more, but the whole market buys 12 kg more.

"Does only price change demand?" No. When a new smartphone comes out, people queue up even though it is expensive. Other factors shift demand even at the same price:

1. Prices of related goods.

• Substitutes can replace each other: tea and coffee, mangoes and bananas. If coffee gets dearer, more people buy tea. If Srivalli cannot afford mangoes, she buys bananas.
• Complements are used together: smartphones and earphones, cars and petrol, printers and cartridges, cinema tickets and popcorn. If cinema tickets get dearer, fewer people go, so popcorn sales at the cinema fall too.

2. Income: when a family earns more, it can buy more, or better, things.

3. Taste and preference: Srivalli loves mangoes and will not switch to oranges even if oranges are cheaper.

4. Population: India is the most populous nation, so it has huge demand. Its make-up matters too: more children means more sports shoes; more working adults, more formal shoes; more elderly people, more comfortable shoes.

5. Seasons: crowded bookshops at the start of the school year, sweet shops at festivals, sweaters in winter.

6. Future price expectations: if people expect prices to fall, they wait (for example, for Diwali or New Year discounts); if they expect prices to rise, they buy now.

"Why do I want fewer mangoes as I eat more?" The first mango is delicious. The second is good. By the fourth you can hardly face another. Each extra mango gives less satisfaction than the one before: this is diminishing marginal utility. As the satisfaction falls, so does the price you are willing to pay.