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Meaning of Demand

The document defines demand and explains the key differences between desire and demand. Demand requires willingness and ability to pay. It then lists the 11 main determinants of demand, including price, income, prices of substitutes and complements, and expectations about future prices. The document also discusses the different types of demand, such as individual vs market demand. Finally, it outlines the law of demand, which states that, all else equal, quantity demanded varies inversely with price.

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Saroj kumar Biswas
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57 views4 pages

Meaning of Demand

The document defines demand and explains the key differences between desire and demand. Demand requires willingness and ability to pay. It then lists the 11 main determinants of demand, including price, income, prices of substitutes and complements, and expectations about future prices. The document also discusses the different types of demand, such as individual vs market demand. Finally, it outlines the law of demand, which states that, all else equal, quantity demanded varies inversely with price.

Uploaded by

Saroj kumar Biswas
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Meaning of Demand:

In ordinary language, demand means a desire. Desire means an urge to have something. In
Economics, demand means a desire which is backed by willingness and ability to pay.

For example, if a person has the desire to purchase a television set but does not have the adequate
purchasing power then it will be simply a desire and not a demand. Thus, demand is an effective
desire. All desires are not demand. In short,

Demand = Desire + willingness to purchase + Ability to pay.

Definition of Demand:

According to Benham, “the demand for anything at a given price is the amount of it, which will be
bought per unit of time at that price.”

Thus, following are the features of demand:

1) Demand is a relative concept.

2) Demand is essentially expressed with reference to time and price.

Determinants of Demand:

The demand for goods is determined by the following factors:

1) Price: Price determines the demand for a commodity to a large extent. Consumers prefer to
purchase a product in large quantities when price of a product is less and they purchase a
product in small quantities when price of a product is high.
2) Income: Income of a consumer decides purchasing power which in turn influences the
demand for the product. Rise in income will lead to a rise in demand for the commodity and
a fall in income will lead to a fall in demand for the commodity.
3) Prices of Substitute Goods: If a substitute good is available at a lower price then people will
demand cheaper substitute good than costly good. For example, if the price of sugar rises
then demand for jaggery will, rise.
4) Price of Complementary Goods: Change in the price of one commodity would also affect the
demand for other commodity. For example, car and fuel. If the price of fuel rises, then
demand for cars will fall.
5) Nature of product: If a commodity is a necessity and its use is unavoidable, then its demand
will continue to be the same irrespective of the corresponding price. For example, medicine
to control blood pressure.
6) Size of population: Larger the size of population, greater will be the demand for a
commodity and smaller the size of population smaller will be the demand for a commodity.
7) Expectations about future prices : If the consumer expects the price to fall in future, he will
buy less in the present at the prevailing price. Similarly, if he expects the price to rise in
future, he will buy more in the present at the prevailing price.
8) Advertisement : Advertisement, sales, promotion scheme and effective sales- manship tend
to change the preferences of the consumers and lead to demand for many products. For
example, cosmetics, tooth brush etc.
9) Tastes, Habits and Fashions: Taste and habits of a consumer influence the demand for a
commodity. If a consumer likes to eat chocolates or consume tea, he will demand more of
them. Similarly, when a new fashion hits the market, the consumer demands that particular
type of commodity. If a commodity goes out of fashion then suddenly the demand for that
product tends to fall.
10) Level of Taxation: High rates of taxes on goods or services would increase the price of the
goods or services. This, in turn would result in a decrease in demand for goods or services
and vice-versa.
11) Other factors:
1) Climatic conditions
2) Changes in technology
3) Government policy
4) Customs and traditions etc.

Type of Demand

1. Individual Demand and Market Demand:

a. Individual Demand: Demand for goods and services by the single consumer,

b. Market demand is the demand for a product by all the consumers who buy that
product. It is the aggregate of the individual demand.

2. Derived Demand and Direct Demand:

a. When the demand for a product/outcome is associated with the demand for
another product/outcome is called as the derived demand or induced demand.
Such as the demand for cotton yarn is derived from the demand for cotton
cloth.

b. When the demand for the products/outcomes is independent of the demand for
another product/outcome is called as the direct demand or autonomous
demand. Such as, in the above example the demand for a cotton cloth is
autonomous.

3. Industry Demand and Company Demand:


•The industry demand refers to the total aggregate demand for the products of a
particular industry, such as demand for cement in the construction industry.
• Company demand is a demand for the product which is particular to the company and
is a part of that industry. Such as demand for tyres manufactured by the MRF. Thus, the
company demand can be expressed as the percentage of the industry demand.
4. Price Demand: The price demand mea purchase at a given price. Eans the amount of
commodity a person is willing to
5. Income Demand: The income demand refers to the willingness of an individual to buy a
certain quantity at a given income level. There is Direct/Positive relation between
Income & Demand.
6. Cross Demand: Demand for a commodity depends on the price of other related products
is called as the cross demand.
Such as with the increase in the price of coffee the consumption of tea increases since
tea and coffee are substitutes to each other.
Also, when the price of cars increases the demand for petrol decreases, as the car and
petrol are complementary to each other.

The Law of Demand

It explains the relationship between price and quantity demanded of a commodity.

“Keeping other factors that affect demand constant, a fall in price of a product leads to
increase in quantity demanded and a rise in price leads to decrease in quantity
demanded for the product”.

Assumptions:

•Income of the consumer is constant.

•There is no change in availability and price of the related commodities (i.e. complementary and
substitutes)

•There are no expectations of the consumers about changes in the future price and income.

•Consumers’ taste and preferences remain the same.

•There is no change in the population and its structure.

Important Features of Law of Demand

1. There is an inverse relationship between price and quantity demanded.


2. Price is an independent variable and demand is a dependent variable

3. It is only a qualitative statement and as such it does not indicate quantitative changes in
price and demand.

4. Generally, the demand curve slopes downwards from left to right.

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