Law ofDemand
Concept ofDemand
In Economics, demand refers to effective demand, which implies
threethings:
a) Desire,
b) Means to purchase,and
c) On willingness to use those means for thatpurchase
Features ofDemand
1) Desires and Demand: Demand is the amount of commodity for which a
consumer has willingness and ability to buy.
2) Demand and Price: Demand is always at a price. Unless price is stated,
the commodity has no meaning. The consumer must know both the price
and the commodity.
3) Point of Time: The amount demanded must refer to some period of time.
Such as 10 kg of rice per week. The amount demanded and price must
refer to a particulardate.
4) Utility: Demand depend upon utility of the commodity. A consumer is
rational and demands only those commodities which provideutility.
Objectives of DemandAnalysis
1) Demand Forecasting: Forecasting of demand is the art of predicting
demand for a product or a service at some future date on the basis of
certainpresentandpastbehaviourpatternsofsomerelated events.
2) Production Planning: Demand analysis is prerequisite for the
production planning of a business firm. Expansion of output of the firm
should be based on the estimates of likely demand, otherwise there may
be overproduction and consequent losses may have to befaced.
3) Sales Forecasting: Sales forecasting is based on the demandanalysis.
4) Control of Business: For controlling the business, it is essential to have
a well conceived budgeting of costs and profits that is based on the
estimation of annual demand/sales andprices.
Objectives ofDemand
5) Inventory Control: A satisfactory control of business inventories requires
satisfactory estimates of the future requirements which can be traced
through demandanalysis.
6) Growth and Long Term Investment Programs: Demand analysis is
necessary for determining the growth rate of the firm and long-term
investment planning.
7) Economic Planning and Policy Making: Demand analysis at macro
level for the nation as a whole is of great help, the government can
determine its imoprt and export policies in view of the long-term demand
forecasting and estimation for various goods in thecountry,
Demand & Quantity
Demanded
The term Demand refers to various quantities of commodity that the
consumer is ready to buy at different possible prices of a
commodity.
The term Quantity Demanded refers to a specific quantity to be
purchased against a specific price of a commodity.
Example: A Consumers’ Demand is 2 ice creams if the price per ice
cream is Rs.15, and 4 ice cream if the price per ice cream isRs.10.
Quantity Demandedis 4 ice creams if price happens to be Rs. 10 per
icecream.
Demand Schedule &
DemandCurve
Demand Schedule is that schedule which expresses the relation
between different quantities of the commodity demanded at different
price.
According to Samuelson, “The table relating to price and quantity
demanded is called the demandschedule.
DemandCurveis simply a graphic representation of demandschedule.
According to Leftwitch, “The Demand Curve represents the maximum
quantities per unit of time that consumer will take at variousprices.
Demand Schedule and Demand Curve are of twotypes
1)Individual Demand Schedule & Individual DemandCurve
2)Market Demand Schedule & Market DemandCurve
Refers to a tabular representation of quantity of products
demanded by an individual at different prices andtime.
Demand Function
Individual DemandFunction
Individual Demand function shows how demand for a commodity, by an
individual consumer in the market, is related to its various determinants. It is
Expressed as:
Dx = f (Px, Pr, Y, T,E)
Here, Dx: Quantity Demanded of commodityX
x
P: Price of the CommodityX
Y : Consumer’s Income
T : Consumer’s Taste &Preferences
E: Consumer’sExpectations
N : PopulationSize
Determinants of Demand / Factors
Affecting Demand
1) Price of the Commodity: The law of demand states that other things
being constant the demand of the commodity is inversly related to its
price. It implies that rise in price of commodity brings about a fall in its
purchase and viceversa.
Determinants of Demand / Factors
Affecting Demand
2) Price of Related Goods: Demand for a commodity is also influenced by
change in price of related goods. These are of twotypes:
a)Substitute Goods: These are he goods which can be substituted for
each other, such as tea and coffee, or ball pen and inkpen.
In case of such goods, increase in the price of one causes increase in the
demand for the other and decrease in the price of one causes decrease
in the demand for theother.
Determinants of
Demand / Factors
Affecting Demand
b) Complementary Goods: Complementary goods are those which complete the
demand for each other, and therefore, demandedtogether.
For Example Pen and ink, Car andPetrol.
In case of complementary goods, a fall in the price of one causes increases in the
demand for the other and rise in the price of one causes decrease in the demand
forothers.
Law of
Demand
The Law of Demand States that, other things being constant (Ceteris
Peribus), the demand for a good extends with a decrease in price and
contracts with an increase inprice.
In other words, there is an inverse relationship between quantity
demanded of a commodity and its price.
The term other thing being constant implies that income of the consumer,
his taste and preferences and price of other related goods remains
constant.
