ANALYSIS OF DEMAND

Meaning of Demand:
In ordinary language demand means desire of a person for a particular
commodity or service. But in economics it is more than the desire of a person. Desire becomes
demand only when it is backs up by:
1. Ability to buy (means to purchase) and
2. Willingness to pay the price (willingness to use those means for that purpose)
Let us consider the following two examples:
 A beggar may have willingness to pay but he will not have ability to buy.
 A miser may have ability to buy but he will not have willingness to pay.
Thus, demand for a commodity is, the quantity which consumers are willing and able to buy at a
given price During a given period of time
Features of Demand:
1. Demand is always stated at a price. If price is not stated, the team demand has no meaning. This is
so because a consumer demands different quantities of a commodity at different prices.
2. Quantity demanded is a flow. We are not concerned with a single isolated purchase, but with a
continuous Flow of purchases. So demand should always be stared for a given period of time. For
example, 1000 Oranges per day, 7000 oranges per week etc.
Determinants of Demand:
1. Price of the commodity: Ceteris paribus (i.e. other things being equal), demand for a commodity
is Inversely related to its price. In other words, if price falls demand extends and if price rises
demand Contracts.
2. Prices of related commodities: Demand for a particular commodity not only depends on the
price of that commodity but also depends upon the prices of related commodities i.e. substitutes and
complementaries.
3. Level of income of the household: Generally, as income of people increases demand also
increases and as income of people decreases demand also decreases.
4. Tastes and preferences of consumer: A change in the taste and fashions brings about a change
in the demand for a commodity. When a commodity goes out of fashion, the demand for it will
decrease even through the price remains the same.
The demand for certain goods is influenced by demonstration effect i.e. consumption pattern of
other individuals in the society. For example, a person finds a Plasma T.V. in his friend’s house, he
also purchases the same
5. Other Factors:
a) Distribution of income:
 If the wealth of a country is not property distributed, then very few people will become
rich and the majority of people will be poor. Under such conditions the propensity to
consume of the country will be relatively less. In such case, the demand for consumer
goods will be comparatively less.
 If the distribution of income is more equal, then propensity to consume of the country
will be Relatively high. In such a case, the demand for goods will be comparatively high.
b) Population & Composition of population:
 As population increases. Demand for all types of goods also increases.
 Demand is also affected by composition of population. For example, if there are more
old people in region then demand for toys, baby foods toffees, etc. will be more.
c) Expectations about future: Consumers expect changes in price of a commodity, If they
expect that price of the commodity will rise in future; they demand more quantity now.
Demand Function:
Demand function describes the relationship between quantity demanded and the factors
which Influence demand (determinants of demand). Mathematically, demand function can be
expressed as Follows: Qn  f  p n1 , Pr1 Y, T, O 
Where Qn represents quantity demanded of n commodity,
Pn represents prices of the commodity n,
Pr represents income of related commodities
Y Represents income of the consumer,
T represents tastes and preferences of consumer,
O represents other factors.
 In the above equation, Qr is a dependent variable and Pr , Pn , Yr T are independent,
variables. In other words, it explains the change in demand for a given change for a given
change in determinants of demand
 The demand function reads as: The quantity of commodity demanded by a household
 Qn  is a function Of or depends upon the determinants of demand Pn Pr, Y, T and O
 But it is very difficult to understand such a complicated function.
 To simply, we make the assumption of ‘ceteris paribus’ i.e. ‘Other things being equal’. In
other words, we Assume that all determinants of demand are constant except one variable.
 Thus we can study the impact of each variable on demand. In such a case the demand
function will assume The following from: Q n  f  P Pr , Y, T, O 
n

 By putting a bar over Pr , Y, T, O we assume that these determinants of demand are held
constant and a function relationship is established between quantity demanded of
commodity n and its price.