Demand Analysis

(meaning, types and determinants of

demand)
Dr. Manashi Gogoi
Assistant Professor
Department of Agricultural Economics
and Farm Management
Introduction to the concept ‘Demand’
• Demand is one of the most critical economic
decision variables
• Imperative for functioning of any business
enterprise for its survival and growth.
• Demand analysis is of profound significance to
management.
• Demand is a technical concept from Economics
– Desires to acquire it
– Willingness to pay for it
– Ability to pay for it.
 Concept of Demand
The demand for the commodity can be described as its
quantity at which consumer is willing and able to
purchase or consume a given commodity during a given
period of time.
So, the commodity can be said as demanded when
– A consumer possesses the willingness to buy it
– Possesses the ability to purchase or consume it
– And it is related to a given period of time.
 Determinants of Demand
Demand is a multivariate function and it is determined by many
variables.
Determinants are the factors which influence the demand for a
particular commodity for a given period of time.
Determinants:
1. price of the commodity
2. price of related goods
3. income of consumers
4. tastes and preferences
5. Expectation of consumer
6. Demonstration effect
7. Seasonal variation
8. Spatial variation
9. Social status
• Other factors are : Growth of population, Distribution of National
income, Credit availability, Taxation and subsidies, Climatic conditions
• Price of the commodity: The price of the commodity and its
demand are inversely related. The more the price of a
commodity, the less will be its quantity demand and vice-
versa.
• Price of related goods :
– Complementary products – An increase in the price of one
product will cause a decrease in the quantity demanded of
a complementary product. Example: Rise in the price of
bread will reduce the demand for butter. This arises
because the products are complementary in nature.
– Substitute Product – An increase in the price of one
product will cause an increase in the demand for a
substitute product. Example: Rise in price of tea will
increase the demand for coffee and decrease the demand
for tea.
• Income of consumers: With an increase in the income, of a
consumer, the demand also increases. However, for an
inferior good, an increase in income would result in buying
smaller quantities of it.
• Tastes and preferences: The demand for a good is also
determined by the taste and preference of a consumer. Other
things remaining constant, a consumer would buy more or
less of a good depending upon his/her choice or preference
function.
• Consumer Expectations: Expectations of a higher income or
expecting an increase in prices of goods will lead to an
increase the quantity demanded. Similarly, expectations of a
reduced income or a lowering in prices of goods will decrease
the quantity demanded.
• Demonstration Effect: Sometimes a consumer is motivated
to buy some commodity not because it has become
cheaper or the income has increased, but because the
neighbours/peers have purchased it. On the other hand,
there are also consumers who like to behave differently
from the others.

• Seasonal Variations in demand: The demand for a good

also rises or falls according to the variations in temperature
or climate conditions. Demand for ice creams, cold drinks,
Air conditioners, etc. are extremely high in summers,
whereas demand for blankets and woolens are low.

• Spatial variations in demand: Demand for a good also

varies according to the place or profession in which a
consumer is engaged.
 Demand Function
For use in managerial decision making, the relation between quantity
demand and each demand determining variables must be specified.
Demand function is a comprehensive formulation which specifies the
factors that influence the demand for the product.
Example:
Dx = f (Px, Py, Pz, Y, W, A, E, T, U)
Where,
Dx=demand for item X, A=Advertisement for the
Px= its own price; product
Py=price of its substitutes; E=the price expectation of the
Pz=price of its complements user
Y=income (budget) of the T=taste or preferences of user
purchaser U= all other factors.
W= Wealth of the purchaser
 Types of Demand
• Direct and Derived Demands:
Direct demand : Demand for goods meant for
final consumption; it is the demand for
consumers’ goods like food items, readymade
garments and houses.
Derived demand : Demand for goods which are
needed for further production; it is the demand
for producers’ goods like industrial raw materials,
machine tools and equipments. Thus the demand
for an input or what is called a factor of
production is a derived demand.
• Domestic and Industrial Demands: The example of the
refrigerator can be stated to distinguish between the demand
for domestic consumption and the demand for industrial use.
In case of certain industrial raw materials which are also used
for domestic purpose, this distinction is very meaningful. For
example, coal has both domestic and industrial demand, and
the distinction is important from the standpoint of pricing and
distribution of coal.
• Perishable and Durable Goods’ Demands: Perishable goods
are the final output like bread or raw material like cement
which can be used only once. Durable goods are the items like
a car or a machine which can be used repeatedly.
We can classify goods into several categories: single-use
consumer goods, single-use producer goods, durable-use
consumer goods and durable-use producer’s goods.
• New and Replacement Demands:
If the purchase or acquisition of an item is meant
as an addition to stock, it is a new demand. If the
purchase of an item is meant for maintaining the
old stock of capital/asset, it is replacement
demand.
The demand for spare parts of a machine is
replacement demand, but the demand for the
latest model of a particular machine is a new
demand.
Replacement demand is induced by the quantity
and quality of the existing stock, whereas the
new demand is of an autonomous type.
• Individual and Market Demands:
Individual demand: demand for a commodity from the individual point
of view. The quantity of a product consumer would buy at a given price
over a given period of time is his individual demand for that particular
good. Individual demand is considered from one person‘s point of view
or from that of a family or household‘s point of view. Individual demand
is a single consuming entity‘s demand.
Market Demand: total demand of all the buyers, taken together. Market
demand is an aggregate of the quantities of a product demanded by all
the individual buyers at a given price over a given period of time. Market
demand for a given commodity is the horizontal summation of the
demands of the individual consumers. In other words, the quantity
demanded in the market at each price is the sum of the individual
demands of all consumers at that price
Market demand may be total and segmented market demand