Demand

refers to the
quantity of a commodity
which a consumer is
willing to buy at a
particular price during a
particular period of time.

Demand:

Demand for a commodity refers to the quantity of the commodity which an individual
consumer or a household is willing to purchase per unit of time at a particular price.

The definition for demand implies:

Desire of the commodity to buy the product

His willingness to buy the product

Sufficient purchasing power in his possession to buy the product.

Individual and Household Demand

Demand arises from an individual.

There are commodities which are generally demanded by individual consumers. E.g.
Cigarettes, footwear etc which are called as Individual Demand

There are commodities which are demanded by households. E.g. Refrigerator, house
etc which are called as Household Demand.

Price of the Commodity:

A Consumer buys more of a commodity when its price declines and vice-versa.

For any normal good the price of a commodity and its demand varies inversely other factors
remaining constant.

A fall in the price of a normal good leads to rise in consumers purchasing power. He can buy
more of the product. This is called as Substitution Effect.

An increase in price will reduce his purchasing power and thereby reducing demand for the
commodity. This is called as Income Effect.

Income of the Consumer (Refer Fig. 5.1 Pg No. 76):

An increase in the income of the consumer will lead to increase in purchasing power of
consumer. He would buy more of a product that he had bought earlier.

Here the extent of increase may differ between commodities.

The shifts in the quantity demanded and income move in the same direction.

Incase of commodities like foods, fruits and vegetables the quantity demanded increases
with an increase in income (beyond a period, the demand remains unchanged even with an
increase in income).

There are cases where the quantity demanded decreases even with an increase in income
(Giffen Goods or Inferior Goods) Negative or Exceptional Demand Curve.

Price of Related Goods:

A change in price of one commodity influences the demand of the other commodity, then,
the two commodities are related.

When price of one commodity and the quantity demanded of other commodity move in the
same direction the two are called as Substitutes (Goods that have essentially the same
use).

When price of one commodity and the quantity demanded of the other commodity move in
opposite direction the two are called as Complements (Goods that are used together).

Tastes and Preferences:

The change in tastes and preferences of a consumer in favour of a commodity results in

greater demand for a commodity and vice versa.

Advertisement:

It is to influence the tastes and preference of consumers towards a product and increase
sales.

Expectations:

Expectations of are two types:

Related to their future income: If the consumer expects a higher income in future, he
spends more at present and thereby the demand for goods increases and vice versa.

Related to future price of the good and its related goods: If the consumer expects the
future prices of the goods to increase then he would rather like to buy the commodity
now than later. This would increase the demand for the commodity. The opposite holds
good when it is expected that prices in future will come down.

Demand Function Meaning:

A mathematical expression of the relationship between quantity demanded of the
commodity and its determinants is known as the demand function.

When this relationship relates to the demand by an individual consumer it is known a

individuals demand function.

When it relates to the market it is called market demand function.

Mathematical Expression of Demand Function (Individual Demand):

QdX = f(Px, Y, P1.Pn-1, T, A, Ey, Ep, u)
QdX refers to the quantity demanded of product X
Px,

refers to the price of the product X

refers to the level of household income

P1.Pn-1 refers to the prices of all the other related products in economy (related products
include substitutes and compliments)
T

refers to the tastes of the consumers

refers to the advertising

Ey

refers to the expected future income

Ep

refers to the expected future prices

refers to all those determinants which are not covered in the above.

Mathematical Expression of Demand Function (Market Demand):

QdX = f(Px, Y, P1.Pn-1, T, A, Ey, Ep, P, D, u)
QdX refers to the quantity demanded of product X
Px,

refers to the price of the product X

refers to the level of household income

P1.Pn-1 refers to the prices of all the other related products in economy (related products
include substitutes and compliments)
T

refers to the tastes of the consumers

refers to the advertising

Ey

refers to the expected future income

Ep

refers to the expected future prices

refers to the population (size of the market)

D
u

refers to the distribution of consumers in various categories depending on income,

age, sex etc.
refers to all those determinants which are not covered in the above.

Determinants of Demand:

An individuals demand for a commodity depends on the households Desire for the
commodity and to purchase it.

The desire to purchase is revealed by Tastes and preferences of the individual /

households.

The capability to purchase depends upon his Purchasing power (Income and Price of
the commodity).

Since households purchase a number of commodity, their quantity depends upon the
price of that particular commodity and prices of other commodities.

All of the above are all called as explanatory variables and the quantity demanded of a product
by a consumer is called the explained variables.
The important determinants of demand are:
a. Price of the Commodity
b. Income of the Consumer
c. Price of Related goods
d. Tastes and Preferences.
e. Advertisement
f. Expectations

 Individual

Demand

Function
Market Demand
Function

It shows how demand for a commodity, by an individual

consumer in the market, is related to its various determinants.
Dx= f(Px,Px,Y,T,E)

Price of commodity: Other things being equal, with the rise in

price of commodity, its demand contracts, and with a fall in
price its demand extends. This inverse relationship between
price of the commodity and its demand is called Law of Demand.

Price of other goods: Demand for good x is influenced by the

price of other goods(z). is called cross price demand.
Dx= f(Pz)

Income of Consumer: Change in the income

of the consumer also influences his demand
for different goods. The demand for normal
goods tends to increase with increase in
income and vice versa. On the other hand,
the demand for inferior goods like coarse
grain tends to decrease with the increase in
income and vice versa.

Taste and Preferences: The Demand for

goods and services depends upon the
individual taste and preferences. They
include fashion, habit, custom etc. Taste
and Preferences of the consumer influenced
by advertisement, change in fashion, climate
and new inventions etc.

Expectation: If the consumer expects that

price in future will rise, he will buy more
quantity in present, at existing price.
Likewise if the consumer expects that price
in future will fall, he will buy less quantity in
present, or may even postpone his demand

Market Demand Function shows how market

demand for a commodity is related to its
various determinants.It is expressed as
under:
Mkt. Dx =f(Px,Pr,Y,T,E,N,Yd)

Apart from the above factors, we can Say

that only two types of new factors are added
in market demand function. This are:
N = Population Size
Yd = Distribution of Income.

Population Size: Demand increase with increase in

population and decrease with decrease in population.
That is because within increase in population size,
the number of buyers of product tends to increase.
Composition of population also affects demand. If
composition of population change, e.g. female
population increases, demand for goods meant for
women will go up.

Distribution of Income: Market demand is also

influenced by change in the distribution of income in
the society. If income is equally distributed, there
will be less demand. In case of unequal distribution,
most people will have enough money to buy things.

i) Direct and Derived Demands:

Direct demand refers to demand for goods
meant for final consumption; it is the
demand for consumers goods like food
items, readymade garments and houses. By
contrast, derived demand refers to demand
for goods which are needed for further
production; it is the demand for producers
goods like industrial raw materials, machine
tools and equipments.

ii) Domestic and Industrial Demands

The example of the refrigerator can be
restated 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.

iii) Autonomous and Induced Demand

When the demand for a product is tied to the
purchase of some parent product, its demand
is called induced or derived.
Autonomous demand, on the other hand, is
not derived or induced. Unless a product is
totally independent of the use of other
products.

iv) Perishable and Durable Goods

Demands
Both consumers goods and producers goods
are further classified into perishable/nondurable/single-use goods and durable/nonperishable/repeated-use goods. The former
refers to final output like bread or raw
material like cement which can be used only
once. The latter refers to items like shirt,
car or a machine which can be used
repeatedly.

v) 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.
Such replacement expenditure is to
overcome depreciation in the existing stock.

vi) Final and Intermediate Demands

This distinction is again based on the type of
goods- final or intermediate. The demand for
semi-finished products, industrial raw
materials and similar intermediate goods are
all derived demands, i.e., induced by the
demand for final goods. In the context of
input-output models, such distinction is
often employed.

vii) Individual and Market Demands

Individual Demand means quantity
demanded of a good by an individual
consumer at various prices per time period.
Market Demand means the aggregate of the
quantities demanded by all consumers in the
market at different prices per time period.