DEMAND

Definition: -

Demand for a commodity refers to the quantities of a commodity which consumers are willing
and able to purchase at various possible prices during a particular period.

The following remarks need to be noted in this definition of demand:

1. In common language, the terms ‘demand’ and ‘desire’ are used to convey the same meaning.
But in economics, demand for a commodity is not the same thing as desire for it. Desire is just
a wishful thinking. It refers to the idea of having something. Demand refers to both the desire
to purchase and the ability for a commodity. It is only when desire is backed by the willingness
and power to pay that gives rise to demand. In other words, demand is an effective desire,
i.e., a desire accompanied by the willingness to purchase and power to purchase. Thus, a
desire to buy a good backed by willingness to pay and ability to pay becomes effective
demand. For instance, I may have the desire for a car, but it will become demand only when I
have the adequate amount of money to purchase the car and I am willing to spend that money
to purchase the car.
2. Demand in economics is always at price. It makes no sense if it is not related to a price. For
example, we may be willing to purchase a shirt if is available for 500rs, but we may not buy it
at all if the shirt is priced at 800rs.
3. Demand is always expressed with reference to a particular time period. For example, demand
for a car will be quite different if the period in question is one day, one week, or one year.

Types of Demand: -

1. Individual demand and market demand

Individual demand refers to the quantities of a commodity that an individual
consumer is willing to purchase at various prices during a given period of time. An individual
consumer is called a household in economics. Therefore, individual demand is the same thing
as household demand. For instance, the quality of milk purchased per day by your mother is
individual demand for milk.
Market demand refers to the total quantities of a commodity that all the households
are willing to buy at various prices during a given period of time. For instance, total quantity
of milk which all the buyers are willing to buy at a given price per day is the market demand
for milk.

2. Ex ante and Ex post demand

Ex ante demand refers to the amount of goods that consumers want to or willing to
buy during a particular time period. It is the planned or desired amount of demand.

Ex post demand, on the other hand, refers to the amount of the goods that the
consumers actually purchase during a specific period. It is the amount actually bought.

3. Joint Demand
Joint demand refers to the demand for two or more goods which are used jointly or
demanded together. For example, car and petrol, butter and bread, milk and sugar etc. are
the goods which are used together. In case of joint demand, a raise in the price of the one
good leads to a fall in the demand for other good and vice-versa.
 4. Derived demand

The demand for a commodity that arises because of the demand for some other
commodity is called Derived demand. For instance, demand for steel, bricks, stones, cement,
wood etc. is a derived demand, derived from the demand for houses and other buildings. For
instance, the demand for a labor in a textile mill is derived from the demand for the cloth
produced by the labor.

5. Composite demand

Demand for goods that has multiple uses is called composite demand. For example,
the demand for steel arises from various users of steel such as use of steel in making utensils,
bus bodies, room coolers, cars and so on.

Determinants of demand/Factors Affecting Demand

1.Price of the Commodity

There is an inverse relationship between the price of the commodity and its quantity
demanded. It implies that lower the price of the commodity, the larger is the quantity
demanded; and the higher the price, the lesser is the quantity demanded.

2.Income of the consumer

While discussing the relationship between the income of the consumer and the
demand for the commodity, we may distinguish between three types of goods:
i. Normal goods (NG): Normal goods are those goods the demand for which increases
with increase in income of the consumers, and decreases with fall in income. So, there
is a positive relationship between consumers income and the quantity demanded. For
instance, a consumer may increase his demand for clothes, refrigerators, television
sets and cars as his income increases.
ii. Inferior goods (IG): Inferior goods are those goods the demand for which falls with
increase in income of the consumer and increases with fall in income so there is an
inverse relationship between income of the consumer and the demand for inferior
goods. For example, the demand for coarse cereals, like maize or jowar may decrease
when income increases beyond a particular level because the consumers may
substitute it by a superior cereals like wheat or rice. Coarse cereals, coarse cloth and
black and white television are examples of inferior goods.
iii. Inexpensive necessities (IN): In case of inexpensive necessities of life such as salt and
match box, the quantities purchased increases with increase in income up to a certain
level and thereafter it remains constant irrespective of the level of income.
3.Consumers’ tastes and preferences

Tastes and preferences depend on social customs, habits of the people, fashion,
general lifestyle of the people, advertisement, new inventions, etc. Some of these factors like
fashion keep on changing, leading to change in consumers’ tastes and preferences. As a result,
the demand for different good changes. People switch over from the cheaper old-fashioned
goods to costlier ‘mod’ goods. Increased demand for ‘smart designer clothes’ is an example
of change in taste. The physical fitness craze leading to an increase in demand for gym is
another example.

4.Prices of Related Goods

If a change in the price of one good affect the demand for another goods, we say that
these two goods are related. Related goods can be classified into two categories, namely:
i. Substitute goods:
Substitute goods are those goods which satisfy the same type of need and
hence can be used in place of one another two satisfy a given want. Tea and coffee,
coke and Pepsi are examples of substitute goods.

ii. Complementary Goods:

Complementary goods are those goods which are complementary to one

another in the sense that they are used jointly or consumed together to satisfy a given
want, like car and petrol, gas and gas stoves. There is an inverse relationship between
the demand for a good and the price of its complement.

5.Consumers’ Expectations

Consumers’ expectations about such things as future prices, income, availability of

goods, etc., play an important role in determining the demand for goods and services in the
current period because goods can be stored or their consumption can be postponed.

6.Consumer-Credit Facilities

If consumers are able to get credit facilities or they are able to borrow from the banks,
they would be tempted to purchase certain goods they could not have purchased otherwise.
For instance, the demand for cars in India has increased partly because people are able to get
loans from the banks to purchase cars. Credit facilities mostly affect the demand for expensive
durable goods.

7.Demonstartion Effect

Demonstration effect refers to the tendency of a person to emulate the consumption

style of other persons such as his friends, neighbors, etc.

8.Size and Composition of Population

Composition of population refers to the various facets of population like the number
of children, adults, males, females, etc., in the population. An increase in the size of population
will increase the demand for a commodity by increasing the number of consumers and, vice
versa. For example, needs of young and old, males and females, etc. differ. If the number of
teenagers in the population of a country increases, the demand for those goods that
 teenagers tend to buy such as jeans, cricket bats, etc. will increase. These are the demographic
effects on the demand for different goods.

9.Distribution of Income

Distribution of income in the country also affects the demand for goods. If the
distribution of income in a country is unequal, rich people will have larger purchasing power
with them. Therefore, there will be more demand for luxury goods like cars and LED television.
On the other hand, if the income is evenly distributed there will be less demand for luxury
goods and more demand for essential goods(necessities).

10.Climatic Factors

Demand for different words depends on the climatic factors because different goods
are needed for different climates. For instance, the demand for ice, fans, air conditioners, cold
drinks, cotton cloths, etc. increases in summer. Likewise, in winter, the demand for heaters,
blowers, hot drinks, woolen cloths, etc. increases.

11.Government Policy

Economic policy of the government also influences the demand for commodities. If
the government imposes taxes on various commodities in the form of GST, excise duties, etc.
the prices of commodities increase. As a result, demand for these commodities will fall. But,
on the other hand, if the government incurs more expenditure on the construction of roads,
bridges, in setting up industries, etc., the demand for the goods needed for construction will
increase.

Demand Function:

A demand function states the relationship between the demand for a product and its various
determinants. The below equation is called ‘Demand Function’.

Dn = f (Pn, P1…..Pn-1,Y,T,E,H,Y,G…..)

Law of Demand:

The law of demand states that, other things remaining equal, the quality demanded of a
commodity increases when its price falls and decreases when its price rises.