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Analysis of Market Demand

Demand for a commodity is the desire to possess that commodity backed up by a willingness and
ability to pay for it.
Demand is always mentioned in relation to time period and place. For example, we can say the
demand for televisions in Baroda was 100000 units during the year 2013.
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 individuals demand for the commodity.
All the individuals demands when added together is called the market demand
Demand for a firm and Industry demand: The quantity of a firms 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 consumers income


4.consumers taste and preference
5. advertisement of the product
6. demonstration and band wagon effect.
7. Consumers 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 of 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.

Consumers 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 consumers income.
Normal Goods:
These are the goods whose demands increases with the increase in consumers 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 consumers choice against rival products.
- by setting new trends and changing tastes.
Consumers Expectations and Demand
Consumers 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.

The Law of Demand


The Law of Demand states that other things remaining constant, the demand for a good
increases with a decrease in its Price.
In other words, the demand for a good and its price enjoy inverse proportionality.
But the law of demand is subject to certain assumptions.
Assumptions of the law of demand:
1. There is no change in tastes and preferences of the consumers.
2. There is no change in the income of the consumers.
3. There is no change in the prices of the commodities related to the commodity in demand.
Reasons for the Law of Demand:
The two main reasons for the Law of Demand are the Substitution Effect and the Income Effect.
Substitution Effect: When the price of a commodity falls, it becomes cheaper as compared to
other related commodities. As a result, consumers substitute the other commodity with the
commodity whose price has fallen. Hence, the demand for that commodity increases.
For example, if the price of tea falls and the price of coffee remains the same, many consumers
will stop using coffee and instead start using tea. This increases the consumption of tea and thus
increases its demand. This is substitution effect.
Income Effect: As the price of a commodity is reduced, the consumer has to spend lesser
amount of money for the same amount of commodity. In other words, his real income increases.

With this increase in real income, he can purchase more of the commodity for the same amount
of money.
Other Reasons: There are other reasons also for the law of demand. They are1. New Consumers: When the price of a commodity is reduced then many other consumers who
were not consuming the commodity earlier because of its high price also start using the
commodity. This increases the demand for the commodity.
2. Different uses of the commodity: when the price of a commodity is high, it is used only for
the more important purposes. When the price is reduced, the commodity will be put to many
other uses where it was not being used earlier. This will increase its demand.
Exceptions to the Law of Demand: The law of Demand is applicable to only normal goods.
There are certain exceptions for which the law of demand does not hold good. They are1. Inferior goods or Giffen Goods: Giffen goods are inferior goods whose demand decreases
with a decrease in their price. For example in India, jowar, bajra are Giffen Goods, wheat or rice
being the superior goods.
This because, jowar and bajra are substitutes of wheat in India.
When the price of bajra is reduced, there is an increase in the real income of the consumer. With
this increase in real income, he does not buy more of bajra, but rather buys more of wheat, and
reduces the quantity of bajra proportionately. Thus the quantity of bajra demanded reduces even
if the price is reduced.
2. Articles of Distinction or Snob Appeal: The demand for articles of distinction like diamond
and jewellry is more when the price is high. This is because these goods have snob appeal and a
rich mans desire for distinction is satisfied better when the articles of distinction are highly
priced and the poorer cannot buy them.
3. Speculative Goods: There are many commodities whose prices are expected to fall or rise in
the future. In such cases, if people expect a price rise in future, they will rush to purchase more
of the commodity at the present price. If they expect the price to fall, they will purchase less of
the commodity to derive benefit from the fall in price later on.