What is demand?

 A mere desire to have a commodity is not termed as demand in economics.

In economics demand means effective demand. Demand means both
willingness and capacity to purchase a commodity. Thus, to be a demand,
a desire must be backed by adequate purchasing power.
The demand for a commodity depends on four factors,
a) The price of the commodity
b) The income of the consumers
c) The taste and preference of the consumers
d) The price of the substitute
Demand for a good by a consumer can vary in response to several factors such
as its own price, prices of other related goods, income of the consumer, tastes and
preferences of the consumer etc.
Symbolically,
Dx = f (Px, PY, Y, T,…)
Where,
Px is the price per unit of good X,
PY is the prices of the related goods,
Y is the income of the consumer,
T represents the tastes and preferences of the consumer.
Following are the leading determinants of demand:
(a) Price of the Commodity: The first determinant of the demand for a good is its
own price. The consumer compares the marginal utility expected from a good with
its price and decides whether it is worth buying or not. A fall in the price induces
the consumer to buy more of the good and an increase in the price causes a fall in
demand.
(b) Prices of Related Commodities: Prices of related commodities also affect the
demand of the commodity (say X). There are two ways in which a good can be
related to another good:
 Substitute goods: If the price of a substitute good, Y increases, the demand for
that good fall and the consumer wants to buy more of X instead. In contrast, if
the price of the substitute good falls the consumer increases the demand for that
good and hence wants to buy less of X. It has positive cross price effect.
 Complement goods: If the price of a complementary good, Y increase, the
demand for that good fall so does the demand of its complement X. In the same
way, a fall in the price of a complementary good causes an increase in the
demand for X. It has negative cross price effect.
(c) Levels of Income: The demand for a good is also affected by the levels of the
income of the consumer. With an increase in income the consumer wants to buy
more of a good. However, if the good is considered an ‘inferior’ one, he is expected
to reduce its demand when his income increases.
(d) Expected Change in Price: If price of a good is expected to increase, demand
for that good also increases and vice-versa. A consumer wants to buy a good before
its price goes up and will postpone its purchase if price is expected to fall.
(e) Other Factors: Other factors which affect the aggregate market demand for a
good include the size of population, the marketing and sale campaigns by the
suppliers, the ‘selling expenses’ incurred by the sellers, the tastes and preferences
of the buyers, and distribution of income and wealth. For example, the richer
sections are likely to spend a smaller proportion of their incomes on basic
necessities and a larger proportion on luxuries and durable consumer goods.
Types of demand
1. Price demand – It refers to the different quantities of the commodity or service
which consumers will purchase at a given time and at given price, assuming
other things remaining the same. It is the price demand with which people are
mostly concerned and as such price demand is important notion in economics.
Price demand has inverse relation with the price. As price of commodity
increases its demand falls and as the price decreases, its demand rises.
2. Income demand – It refers to the different quantities of a commodity or service
which consumers will buy at different levels of income, assuming other things
remaining constant. Usually, the demand for a commodity increases as the
income of a person increases unless the commodity happens to be an inferior
product. For example, 2nd hand cars are cheap. The demand for such product
decreases as the income of a person increases.
3. Cross demand – When the demand for a commodity depends not on its price
but on the price of other related commodities, it is called cross demand. Here
we take closely connected or related goods which are substitutes for one
another. For example, the and coffee are substitutes for one another. If the price
of coffee rises the consumer will be induced to buy more of tea and hence the
demand of tea will increase. Thus, in case of substitutes when the price of one
related commodity rises, the demand of the other related commodity increases
and vice – versa.
But in case of complimentary or joint demand goods, example pen and ink
etc. when the price of one commodity rises, the demand for it will fall and as a
result of it the demand for the other joint commodity also falls even through its
price remains the same.
4. Direct demand – Commodity or services which satisfy our wants directly are
said to have direct demand. For example, all consumer goods like clothes, books
etc. satisfy our wats directly, so they are said to have direct demand.
5. Derived demand or indirect demand – commodities or services demanded for
producing goods which satisfy our wants directly are said to have derived
demands. For example, demand for a factor of production say labour is derived
demand because labour is demanded to help in the construction of houses which
will directly satisfy consumer’s demand.
Thus, the demand for labour which helps us in making a house in a case of
indirect or derived demand. The labour is called derived demand because its
demand is derived from the demand of a house.
6. Joint demand – In finished products as in case of bread, there is need for so
many things – the services of the mill, oven, fuel etc. The demand for them is
called joint demand. It is a relationship between two or more commodities that
are demanded together to satisfy a particular want. For example, demand for car
and petrol, tea and sugar etc.
7. Composite demand – A commodity is said to have a composite demand when
its use is made in more than one purpose. For example, the demand for milk.
Milk can be used to make various sweets, curd, or simply for drinking purpose.
The Law of Demand:
The law of demand is one of the very important laws of economics. The law
of demand states that when the price of a commodity increases the demand for the
commodity decreases and conversely, when the price of a commodity decreases
 the demand for that commodity increases. Thus, the law states that demand varies
inversely with price but not proportionately.
Factors governing the law of demand:
Following are the important factors which are responsible for the operation of the
law
a) The law of diminishing marginal utility: The law of diminishing marginal
utility is the first reason underlying the law of demand. According to this law,
if we purchase more and more of a commodity, the marginal utility of that
commodity gradually declines. The consumer will not buy a large quantity of
the commodity, until and unless the price of the commodity becomes low. Thus,
when price increases, the consumer must reduce his purchases.
b) The income effect: When the price of a commodity declines the real income of
the consumer increases and he purchases more of that commodity. But when
the price increases the consumer’s income declines and thus, he will curtail his
expenditure on the commodity. So, with the increase in price there is a fall in
the purchase of the commodity.
c) The substitution effect: When the price of a commodity rises, the consumer
will purchase the substitute of that product, if any. But if the price of the
commodity declines, it will be a substitute for costlier things. For example, if
the price of tea falls then more tea will be consumed in place of other beverages
like coffee. But if the price of tea increases. Other commodities (coffee) will be
consumed in its place. Thus, demand for a commodity increases with the fall in
its price and conversely decreases with the rise in its price.
Assumptions to The Law of Demand: The law of demand is based on the
following assumptions:
a) The habits and tastes of the people remain unchanged.
b) The income of the people remains the same.
c) The prices of other goods remain the same.
Exceptions to the law of demand: The law of demand does not operate in the
following cases:
1. In case of conspicuous consumption (luxury goods) the law of demand does
not operate. When the price of a cosmetic increases, the people’s demand for
that may not decrease.
 2. In case of speculative markets, a rise in price always increases the demand
for product and results in larger purchases.
3. In case of Griffen’s inferior goods, the law of demand does not hold good.
4. Law of demand does not hold good if the consumer’s taste, fashion, and
income change.
5. Law of demand also fails to operate if prices of the substitutes change.
Demand Schedule and Demand Curve
The demand schedule is the list of various amounts of a commodity to be
purchased by an individual at different prices. In normal situation, the consumer
purchase different quantities of a commodity at different prices. The list, showing
the quantities of a commodity purchased by a consumer is known as Individual
Demand schedule. Taking together all the demand schedules of all individuals in
a market we can prepare another list. Such type of list is known as Market Demand
Schedule. The following table shows the individual demand schedule of a
commodity
Demand Schedule
Price of apple (in Rs) No of units demanded
6 2
5 3
4 4
3 5
2 6
1 7
Demand curve:
The demand curve simply represents how with the changes in the price of a
commodity demand for that commodity changes. A demand curve is a geometrical
representation of demand schedule. A demand curve is a continuous line. This
simply indicates that there is a definite price for every unit of a commodity,
however small in amount. And the market usually responds to infinitely small
changes in both the price and quantity. However, those assumptions do not hold
true always.
If we represent this demand schedule in diagram then we can get a demand
curve.
In the above figure we see that OY axis represents the price of apple and the OX
axis represents the number of units demanded. When the price of an apple declines
from Rs. 6 to Rs. 5 the demand for apple increases from 2 units to 3 units. In this
way when the price of apple has come down to Rs. 1 the demand for apple
gradually increases to 7 units. Thus, DD line, which slopes downward represents
the demand curve. Similarly, the Fig- 3 represents a demand curve which also
slopes downward and which is convex to the origin 0. Here also when the price of
the commodity is OP the amount demanded is OM. But when the price has
increased to OP2, the demand for the commodity has come down to OL and when
the price has declined to OP1the demand for the commodity has increased to ON.
In both the cases the demand curves slope downward.
Why demand curve slopes downward?
In general, the demand curve slops downward from left to right. This is
mainly due to the operation of law of diminishing marginal utility. When the price
of a commodity declines, old purchasers will purchase more and new purchasers
will also enter the market. If a commodity becomes cheaper some people will
purchase it in preference to some other commodities which they purchased earlier.
Only a downward sloping demand curve shows that shorter is the price line, longer
is the quantity line. Further, if the law of diminishing marginal utility holds good,
the demand curve must slope downward. Because, only a downward sloping
demand curve can represent increase in demand due to fall in the price of a
commodity.
 Besides, there are three other reasons which can also analyse why the demand
curve slopes downward.
a) A fall in the price of a commodity is equivalent to increase in consumer’s
income and this leads to increase in the demand for the commodity. This is
known as income effect.
b) When the price of a commodity falls, it tends to be substituted for other
commodities. This is known as substitution effect.
c) When a commodity becomes cheaper it can be put into alternative uses and
thus its demand increases.
On the other hand, when price rises, we demand less of that commodity because
(a) we substitute other cheaper commodities for it and (b) with the increase in price
our real income declines and thus we curtail our demand.
Causes of change of demand:
i. Changes of habit, taste and fashion of the consumers.
ii. Changes in income of the consumers.
iii. Innovations of new product or new styles.
iv. Changes in the size of population.
v. Changes in the price of substitute or complementary goods.
vi. Future expectations.
vii. Changes in the tax policy of the Government.
Marginal Utility of Good and its Demand Curve
 In above figure, measure (a) units of good X along X-axis, and (b) units of
marginal utility of X (MUx) along Y-axis, and the marginal utility curve of X
(MUx). Thus, for example, point P on the MUx curve shows that the consumer
derives PM units of marginal utility when he buys OM units of X. In other words,
the marginal utility of Mth unit of X equals PM. Similarly, in case the consumer
buys OM’ units of X, then his marginal utility fall to P’M’. Changing marginal
utility of X can be combined with the rationality of the consumer in deriving his
demand decisions. Given the per unit price of X, he is ready to buy it only if its
marginal utility equals or exceeds it. Thus, if the price per unit of X is OB (= PM)
units of utility, then the consumer will buy just OM units of it. No more and no
less. If he buys a smaller quantity, he foregoes some surplus units of utility (which
he gets over and above the price paid) from earlier units of X. This is because the
price X does not change with its quantity purchased by the consumer. Though the
consumer gets higher marginal utility from earlier units of X, the price paid by him
for those units does not increase. And if he buys more than OM units of X, he gets
smaller utility from those additional units, but has to pay the same price OB per
unit. This reasoning can also be applied to the situation where price per unit of X
is OB’ (= P’M’). In that case the consumer buys just OM’ of X - neither more, nor
less. Translating these findings into overall demand decisions of the consumer, the
consumer decides to buy more of X when its price falls and vice versa.
 Inferior Goods: Some goods are consumed generally by poorer sections of the
society. It is believed that with an increase in income such a consumer should
move to a ‘better’ quality substitute good. For example, with an increase in
income, a typical poor consumer shifts his demand from coarse grains to finer
varieties of cereals. Therefore, with a fall in the price of a good (more so a
necessity on which the consumer is spending a large part of his budget), the real
income of the consumer goes up. If, he considers the good under consideration
an inferior good, he reduces its demand and buys more of its substitute(s).
 Giffen Goods: Some special varieties of inferior goods are termed as Giffen
goods. Cheaper varieties of this category like bajra, cheaper vegetable like
potatoes come under this category. Sir Robert Giffen of Ireland first observed
that people used to spend more their income on inferior goods like potato and
less of their income on meat. But potatoes constitute their staple food. When the
price of potato increased, after purchasing potato they did not have so many
surpluses to buy meat. So, the rise in price of potato compelled people to buy
more potato and thus raised the demand for potato. This is against the law of
demand. This is also known as Giffen paradox. So giffen goods are products
that people continue to buy even at high prices due to lack of substitute products.