Meaning of Demand

Generally, people term demand as the desire to get something. But the mere desire for a thing is not demand in economics. It refers to both the desire to purchase and the ability to pay for commodity. A poor person, for instance, may desire to travel to London, but with a lack of means to purchase the air ticket, his desire remains unfulfilled. Here, we may think that a rich person has more money can satisfy his all desires. But if he is greedy or miserly, then he cannot satisfy his desire because he has no willingness to pay. Thus, demand is only the desire which is backed up by the willingness and power to pay. In other words, demand is an effective desire, a desire accompanied by the will to purchase and the power to purchase.

Demand in economics always signifies price, time and place. Effective desire is not the complete meaning of demand. Furthermore, the required commodity should be available at a given price and time.

Bobber writes, "By demand we mean the various quantities of a given commodity or service which consumers would buy in market in a given period of time at various prices, or at various incomes, or at various prices of related goods”

 Types of Demand

Generally, demand is of three types,

1. Price demand

2 Income demand

3. Cross demand

1. Price Demand

Price demand refers to the various quantities of a commodity or service that a consumer would purchase at a given time in a market at various prices, other things being constant. In other words, it establishes a negative relationship between price and demand. mathematically.

where

Qx=f(Px)

Qx=demand of "x good

 f= function

 Px=price of "x" good

2 Income Demand

Income demand refers to the various quantities of a commodity or service that a consumer would purchase at a given time in a market at a various level of income, other things being equal. Generally, it establishes a positive relationship between income and demand. However, the relationship between income and demand for inferior goods is of an inverse order, Mathematically,

Where, Qx=f(Y)

Qx=demand for 'x' good

f=function

Y=Income

3.Cross Demand

As we know, goods are seldom independent. They are related to each other. Cross demand refers to the relationship between the quantity demanded of one good (say 'x' good) and price of related goods (say 'y good), other things being equal. In other words, by cross demand, we mean the change in the quantity demanded of a commodity (say 'x good) without any change in its price but due to the change in price of related goods, le. y good. The related goods are of two types; substitutes and complements. There is a direct relationship between the price of Coke and the demand for Pepsi (substitutes) and a negative relationship between the price of a pen and the demand for ink (complements). Mathematically.

Qx=(Py) where

Qx=demand for x good

f=function

Py-price of "y good 

The other types of demand are as follows:

4. Composite Demand 

:The demand for a commodity that can be put to several uses is a composite demand. Coal, electricity etc, are examples of composite demand. 

5. Direct Demand

The demand for various kinds of goods and services which satisfy the want of the people directly is called direct demand.

6. Derived Demand

The demand for various kinds of labour and materials which go to make the final product is called derived demand.

7.Joint Demand

When several things are demanded for a joint purpose, it is a joint demand. Milk, sugar and tea leaves are examples of joint demand.

 Market Demand Schedule and  Demand Curve:

    Demand Schedule

.  A demand schedule is a table that lists the quantity of a good that a person will purchase at each price in a market.  

1. Individual Demand schedule:

An individual demand schedule shows the quantities demanded at each price by a consumer in the market at given price and time.

     2. Market demand schedule: 

It  is a list that adds the demand schedules of all the buyers in the given market; therefore, a market demand schedule shows the quantities demanded at each price by all the consumers in the market.  The market demand schedule also illustrates the law of demand, as the price increases the demand decreases.

Demand Curve:

A demand curve is a graphic representation of a demand schedule.  When making a demand graph, the vertical axis represents the prices and the horizontal axis represents the quantity of goods in demand.  

A demand graph can represent an 

1. individual demand schedule or

2. market demand schedule.  

The market demand curve can also be used to predict how people will change their buying habits when the price of the god rises or falls.  The market demand curve is only accurate for one very specific set of market conditions.      

Distinction between Individual and Market Demand

Both individual demand curve and market demand curve slope downward from left to right and both curves establish the negative relation between price and demand. However, these two curves differ from each other in the following respects:

1. Individual demand curves are nearer to origin but market demand curve is farther from origin (or flatter).

1. Individual demand curves are individual in nature but market demand curve is the horizontal summation of all individual demand curves.

1. Individual demand curves show the small quantity of demand for a commodity hot market demand curve shows the large volume of quantity demanded for a commodity.

Determinants of Demand

There are various factors on which the market demand and individual demand for a product depends. These factors are known as determinants of demand. The knowledge of the determinants of market demand for a product and the nature of relationship between the demand and its determinants proves very helpful in analyzing and estimating demand for the product. These factors can be summarized as follows

1.Price of a product:

Price of a product is one of the most important determinants of its demand in the long run and the only determinant in the short run. The quantity of the product demanded by the consumer inversely depends upon the price of the product. If the price rise demand falls and vice versa. The relation between price and demand is called Law of demand. It is not only the existing price but also the expected changes in price which affect demand.

2.Price of related goods (substitutes and complements)

• If the price of a substitute falls, then demand for a substitute good will increase.

• Confused? Here's an example. If coffee and tea are substitute goods (buyers consumer either one or the other) and the price of coffee falls, then buyers are more likely to purchase coffee over tea.

• If the price of a complement falls, then demand for the complement will increase and so will the demand for the good in question.

• For example, if the price of peanut butter falls then the demand for jelly will increase along with the increase in quantity demanded for peanut butter

3. Income

• As buyers' incomes rise the demand for some goods and services rises as well.

• Goods that follow this trend are called normal goods, and an example of this is whole wheat pasta.

• The opposite of these are inferior goods, and in this case when buyers' income rises the demand for those goods decreases.

• An example of this is canned soup

4.Tastes of consumers

• Depending on what consumers think is desirable, the demand for various goods will shift up and down.

• This is also affected by advertising, health warnings, etc.

• Simply, if people want a good, demand rises, and vice versa

5. Expectations of future prices

• If buyers expect that prices will rise in the future, then demand for that product will rise now.

• For example, if there's a 24-hour sale on the latest iPhone, sales will spike now in comparison to 24 hours later.

• Conversely, if buyers expect that prices will drop in the future they will hold off on buying that product. The stock market works in a similar way to this.

6. Number of Buyers in the Market

The number of consumers plays a vital role in net/total demands. When the number increases, the demand also increases. In some cases, the demand for the product increase with the changes in the population. In other cases, the demand increases as the product become more appealing to the customers. In such scenarios, the population remains the same but more people are buying the same commodity. 

7. Size and composition of population

The market demand for a commodity increases with the increase in the size and composition of the total population. For instance, with the increase in total population size, there is an increase in the number of buyers. Likewise, with an increase in the male composition of the population, the demand for goods meant for male increases.

8. Season and weather

The market demand for a certain commodity is also affected by the current weather conditions. For instance, the demand for cold beverages increase during summer season.

9. Distribution of income

In case of equal distribution of income in the economy, the market demand for a commodity remains less. With an increase in the unequal distribution of income, the demand for certain goods increase as most people will have the ability to buy certain goods and commodities, especially luxury goods.

Demand function is an algebraic expression that shows the functional relationship between the demand for a commodity and its various determinants affecting it. This includes income and price along with other determining factors.

Based on whether the demand function is in relation to an individual consumer or to all consumers in the market, the demand function can be categorized as

• Individual Demand Function

• Market Demand Function

• Individual Demand Function

Individual demand function refers to the functional relationship between individual demand and the factors affecting individual demand.

It is expressed as: Dx = f (Px, Pr, Y, T, F) Where,

Dx = Demand for Commodity x;

Px = Price of the given Commodity x;

Pr = Prices of Related Goods;

Y = Income of the Consumer;

T = Tastes and Preferences;

F = Expectation of Change in Price in future.

Demand function is just a short-hand way of saying that quantity demanded (Dx), which is on the left-hand side, is assumed to depend on the variables that are listed on the right-hand side.

• Market Demand Function

Market demand function refers to the functional relationship between market demand and the factors affecting market demand. Market demand is affected by all the factors that affect an individual demand. In addition to this, it is also affected by size and composition of population, season and weather conditions, and distribution of income.

Mathematically, market demand function can be expressed as,

Dx= f (Px, Pr, Y, T, F, Po, S, D)

Where,

Dx= Demand for commodity x;

Px= Price of the given commodity x;

Pr= Price of related goods;

Y= Income of the individual consumer;

T= Tastes and preferences;

F= Expectation of change in price in the future;

Po= Size and composition of population;

S= Season and weather;

D= Distribution of income.

Based on the slope of the demand curve there are two types of demand functions. If the slope of the demand curve remains constant throughout its length, it is called the linear demand function. It means in the case of linear function the rate of change of the dependent variable and independent variable is the same or a constant rate. Mathematically it can be expressed as;

QX=a-bPx 

Where

QX=Demand for good X;

 Px= Price of good X; 

a= demand intercept or autonomous demand or demand at zero price;

 b= slope of demand function or rate of change in demand with respect to changes in price.

If the slope of demand curves changes all along the demand line then it is said to be non-linear or curvilinear. It means if the independent variable (the price of the commodity) and dependent variable (demand for the same commodity) change at different rates, the demand function will be non-linear. A non-linear demand function is generally expressed in power function as follows;

Qx= aPx-b

As a rectangular hyperbola form;

Where,

Qx= Demand for X good;

 Px= Piece of good X; 

a= Autonomous demand or demand at zero price of demand intercept;

 b= rate of change in demand with respect to changes in demand or slope of the demand curve.