Analysis of Market Demand

• The aggregate of individual demand for a

product is called the market demand for that
product.
• It is the horizontal summation of the individual
demand schedule.
 Types of Demand
• Individual and Market Demand: The quantity
of a commodity which an individual is willing
to buy at a particular price during a specified
time, given his income, tastes and preferences
and prices of related commodities is called
individual’s demand for the commodity.
• All the individual’s demands when added
together is called the market demand
• Demand for a firm and Industry demand: The
quantity of a firm’s product that can be sold at
a given price over a specified time period is
called the demand for the firm.
• The aggregate of demand for the product of
all the firms in the industry is called the
industry demand.
• Autonomous and derived demand:An
autonomous or direct demand is the one that
arises on its own out of a natural desire to
consume a commodity. It is independent of
the demand for any other commodity.
• A derived demand is one which arises because
of the demand for some other commodity
called parent product.
• Demand for durable and nondurable goods:
• Goods whose total utility or usefulness is not exhausted in a
single or short run use are called durable goods.
• Non durable goods on the other hand are those which can
be used only once.
• Durable goods create replacement demand whereas
nondurable goods do not.
• The demand for non durable goods increases or decreases
lineally whereas that of durable goods does exponentially
because the of an increase in stock of durable goods and
hence accelerated depreciation.
• Short term and Long Term demand: Short
term demand for goods is the demand of
goods which are demanded over a short
period of time.
• Long term demand on the other hand is the
demand for goods which exists over a long
time.
 Determinants of Demand
• In general, there are certain factors which affect the demand for a
particular commodity. They are called the determinants of demand.
• 1. Price of the product
• 2. Price of related goods – substitutes and complimentary goods.
• 3. level of consumer’s income
• 4.consumer’s taste and preference
• 5. advertisement of the product
• 6. demonstration and band wagon effect.
• 7. Consumer’s expectations regarding future price and supply position.
• 8. Consumer credit facility.
• 9. Number of buyers
 Price of the Product and demand
• The relationship between the price of a
product and its demand is given by the law od
demand which states that “ all other things
remaining constant, as the price of a product
increases, the demand for the product
decreases.”
• That is the demand and price of the product
enjoy a inverse relationship and therefore the
graph of demand is a negatively sloping curve.
• The relationship between the demand and the
price can be explained in terms of two effects -
Income effect and substitution effect.
 Exceptions to the Law of Demand
• 1. Expectations regarding further prices
• 2. Status goods
• 3. Giffen Goods.
 Price of Related Goods and Demand
• The demand for a product also depends upon
related goods. There are two types of related goods
–
• Substitute Goods: These are the goods that can be
used instead of the goods under consideration. E.g
Tea and Coffee
• Complimentary Goods: these are the goods which
are used jointly with the goods under consideration.
They cannot be used in isolation. E.g Auto and tyre.
 Consumer’s Income and demand
• Income is one of the most important
determinants of demand.
• Generally, the more income of the consumer,
the more is the demand.
• But consumer goods of different nature have
different relationship with income of different
categories of consumers.
• To understand the effect of income on
different nature of goods, the goods are
categorised as under –
• 1. Essential consumer goods
• 2. inferior goods ( Giffen Goods )
• 3. Normal goods
• 4. Prestige or Luxury Goods.
• Essential Consumer Goods:
• these are the basic needs of life and are
consumed by all.
• The demand for such goods increases with the
increase in income, but only upto a certain extent.
• Inferior Goods:
• These are the type of goods whose demand
decreases with the increase in consumer’s income.
• Normal Goods:
• These are the goods whose demands increases
with the increase in consumer’s income.
• It increases rapidly at first with the rise in
income, but slows down after a point.
• Luxury Goods: These are the goods that add to
the pleasure and prestige of the consumer. Their
demand arises beyond a certain level of income.
 Tastes and Preferences and Demand

• As the tastes and preferences of consumers

change, it also changes the demand for goods.
• These tastes and preferences change due
changes in the life styles , social customs,
religious values, age etc.
 Advertisement Expenditure and Demand
• Advertisement Expenditure is incurred generally to
promote sales.
• Advertisement generally has a positive effect on the
demand.
• It effects the demand in 4 ways :
• - by informing the potential consumers about the
availability.
• - by showing its superiority over rival products.
• - by influencing consumer’s choice against rival products.
• - by setting new trends and changing tastes.
 Consumer’s Expectations and Demand
• Consumer’s expectations regarding future prices,
income and supply position also effect the demand
of a commodity or service.
• If the prices of a commodity are expected to rise in
future, consumers buy more of the stock able good,
thereby increasing the demand.
• Similarly, if the future supply of the good is expected
to dry up, the present demand increases because
consumers buy the goods and stock it for future use.
Demonstration Effect and Demand
• These are the goods which are bought to
convey or demonstrate affluence or snob
effect.
• These goods may also be bought because of
peer pressure.
• This type of purchase which is done because
others have the product and has a positive
effect on the demand.
 Credit Facility and Demand
• Availability of easy and cheap credit has a
positive effect on the demand of a commodity
or good.
 Population and Demand
• Given the price, per capita income, tastes and
preferences , the larger the population, the
greater is the demand.
Distribution of National Income and Demand

• The higher the national income, the greater is

the demand for products in a country.
• Apart from the level of national income, the
distribution pattern also has an effect on the
demand.