In economics, the term demand is used in the following three forms – When Demand is an effective desire or when Demand is the quantity of a commodity demanded at a specific price, or when Demand is the quantity of a commodity demanded at a specific time.
Example: Anu is an industrialist and wants to purchase a car. Here, wanting to purchase a car is merely a desire. If Anu has sufficient money and willingness to purchase the car, it is a want. If Anu says, “I am ready to purchase a car”, it cannot be referred to as demand because there is lack of a specific price and time. If Anu says, “I am ready to purchase a car today for INR 5 lakh”, then it can be considered as demand for the car.
Essential Elements of Demand
- There must be a desire to purchase a particular commodity.
- The desired commodity must be available in the market.
- The consumer must have sufficient money and willingness to spend the money for purchasing the commodity.
- The demand must be expressed at a particular price.
- Demand must be expressed at a particular point of time.
The demand function explains the relationship between the demand for a commodity and its determinants.
It is expressed as Qx = f (Px,Pr,Y,E,O)
Out of all the factors, price is the most important factor. Hence,
- Demand is a function of price, that is, Dx = f(Px)
- The quantity demanded includes the intercept of the co-efficient of factors, that is, Qx = a + b*PX
- The demand of a co-commodity ‘x’ reflects an inverse/negative relationship with its price, that is, Dx = a – bPx
For example: The following is a demand equation: Dx = 100 – 25Px
Now, if the prices of x are 1, 2, 3, 4 and 5, the respective quantity demanded is as follows:
Dx = 100 – 25 = 75
Dx = 100 – 25(2) = 100 – 50 = 50
Dx = 100 – 75 = 25
Dx = 100 – 100 = 0
Dx = 100 – 125 = -25
This shows that the demand function for a commodity is a decreasing function of its price.
Types of Demand
1. Individual Demand
It is the demand of an individual consumer for a given product at different prices. It is a microeconomics concept and a component of market demand.
Example: Mr. X buys 10 units at INR 5 per unit.
2. Market Demand
It refers to the demand of all consumers for a given product at different prices. It is the sum of demand of all the individual in the economy. It is a macroeconomics concept and denotes the size of the market for a particular product.
Example: The quantity of market demand for mobile phones at INR 5,000 stands at 100 million pieces.
3. Joint Demand or Complementary Demand
When two products are demanded together, that is, they complement each other, it is referred to as joint demand or complementary demand. In the case of joint demand, when the price of one product falls, the demand for both the products will rise and vice-versa.
Example: Car and petrol have complementary demand.
4. Competitive Demand
This involves two products competing among themselves to satisfy a specific want of the consumer. Competitive demand involves substitutes.
Example: Pepsi and Coca Cola have competitive demand. When the price of Pepsi rises, the demand for Coca Cola may increase.
5. Composite Demand
It refers to the demand for a product that has multiple uses.
Example: Demand for electricity, water, etc.
6. Direct Demand
When a product is demanded for final consumption, it is said to have direct demand. The demand for consumer goods is direct demand.
Example: Demand for bread, butter, textile, TV, etc.
7. Derived Demand
When a product is demanded for further production, that is the demand for the product is a result of demand for some other product, it is said to have derived demand. The demand for producer’s goods is derived from demand.
Example: Demand for land, labour, capital, etc.
Determinants of Demand
- Determinants of Demand are:
- Price of the commodity
- Income of consumers
- Price of related goods
- Habits and preferences
- Size of the population
- Advertising and salesmanship
- Social customs
- Government policies
Law of Demand
The Law of Demand states that When the price of a good is increased (such that all the variables are held constant), the quantity of demand for that good will decrease. Thus, people will buy more at lower prices and less at higher prices. The law of demand explains the relationship between the price of and the demand for a commodity.
The demand for the commodity decreases if its price increases; while its demand increases if its price falls, all other things kept constant. Thus, the law of demand reflects an inverse relationship between price and the quantity demanded.
Demand Schedule and Demand Curve
The law of demand can be illustrated using a demand schedule and demand curve.
A demand schedule shows the quantity of commodity demanded at different prices. It is of two types:
Individual Demand Schedule
It shows the quantity of a commodity that an individual consumer is willing to buy at different prices.
For example, When the price of mange is 10, the quantity demanded is 4.
Subsequently, when the price falls to 9, the demand increases to 6.
Similarly, as the price keeps falling, the quantity continues to increase.
Here, DD is the demand curve which slopes negatively, that is, downward from left to right. This represents the inverse relationship between prices and the quantity demanded at each price; i.e., as the price falls, the quantity demanded increases.
Market Demand Schedule
It shows the quantity of commodity that can be sold in a market at different prices.
It shows the quantity of commodity that can be sold in a market at different prices.
For example: When market price of mango is Rs. 10 and market demand is 20 kg, mangoes demanded by Mr X, Y and Z are 4,6, and 10 mangoes respectively.
Subsequently, when the price falls to Rs. 9, the market demand increases to 26 kg and share of mangoes demanded by Mr X, Y and Z also increase to 6, 8 and 12 mangoes respectively. This trend continues as the price falls further up to Rs. 6.
Here, DD is the demand curve, which slopes negatively, that is, downward from left to right. This represents the inverse relationship between prices and the quantity demanded; i.e., as the price falls, the quantity demanded increases.
Assumptions of the Law of Demand
Other things being equal’ is an important assumption of the law of demand. It refers to the condition under which the law will hold true.
The following are the assumptions of the law of demand:
- The income of the consumer remains constant.
- There is no change in consumer tastes and preferences.
- The population remains constant.
- There is no change in the prices of related goods.
- There is hope of a future change in prices
- Government policy remains constant.
- Weather conditions are the same.
- No new advertisements are introduced.
Reasons for a Downward Sloping Demand Curve
The normal general demand curve slopes downwards due to the following reasons.
1. Law of Diminishing Marginal Utility
As the consumer increasingly consumes a particular commodity, with the consumption of all other commodities kept constant, the consumption of every additional unit of that commodity results in a declining utility for the consumer.
2. Substitution Effect
When the price of a commodity decreases, it becomes relatively cheaper than its substitutes. Therefore, the quantity of the commodity demanded increases owing to costlier substitutes.
3. Income Effect
When the price of a commodity decreases, the consumer can buy more quantity of the commodity at his level of income; this implies that his real income or purchasing power increases.
4. Nature of Consumers
When the price of a commodity is relatively high, only a few consumers can afford to buy it. However, when its price falls, more number of consumers tend to buy it, because some consumers who previously could not afford the commodity may now be able to buy it.
Exceptions to the Law of Demand
1. Giffen’s Paradox (Giffen Goods)
These are goods considered to be inferior by consumers; e.g.; low quality rice, wheat, a used car. For giffen goods, the income effect is negative; that is their demand falls as income rises. Further, the price effect for such goods is negative; that is, their demand falls when price falls.
2. Conspicuous Necessities
For commodities that are necessities such as salt, food grains and medicines, demand is not affected by a change in their prices because consumers can neither increase nor decrease their consumption.
3. Commodities of Prestige
The demand for prestigious goods such as diamonds increases as their prices increase, because such commodities are bought by the wealthy to whom the price does not matter.
4. High-Priced Commodities
Certain products are perceived to be of value and purchased by consumers owing to their high prices, such as cosmetics and decorative pieces. Thus, an increase in the price of such goods does not impact demand.
5. Expectation of Future Changes in Prices:
The law of demand does not apply when the prices are expected to change in the future. For instance, if the price of a commodity increases and there is an expectation of a further increase in its price, the demand for such a commodity will further increase.
During emergencies such as war and famine, the prices of almost all commodities increase and their demand also increases.
Change/Shift in Demand or Variation/Movement of Demand
Demand may change due to the following factors:
- Change in price factors (Extension or Contraction)
- Change in non-price factors (Increase or Decrease)
1. Extension/Contraction of Demand
The law of demand states that the demand for a commodity increases at lower prices and vice versa. This increase in demand (due to a fall in price) is called the expansion of demand, and this decrease in demand (due to an increase in price) is called the contraction of demand.
In this graph, quantity of a commodity demanded is represented on the X axis and prices are shown on the Y axis. OP is the original price, and OQ is the original quantity demanded.
As price increases to OP1, the quantity demanded contracts to OQ1.As price falls to OP2, the quantity demanded expands to OQ2.
2. Increase or Decrease in Demand:
When the demand for a commodity changes in response to a factor other than price, it is referred to as either an increase in demand or a decrease in demand. The Increase in demand indicates a shift of the demand curve towards the right
While the Decrease in demand indicates a shift of the demand curve towards the left
In this graph, OP is the original price, and OQ is the original quantity demanded. DD is the original demand curve when the price remains constant. Demand increases to D1D1 and decreases to D2D2. This change in demand is due to a change in factors other than price.