Theory and Determinants of Demand
In economics, demand is the quantity of a good or service that a consumer is willing and able to purchase at different price levels available during a given time period. Although the demand is the desire of a consumer to purchase a commodity, it is not the same as desire. Desire is just a wish of a consumer to purchase a commodity even though he is unable to buy it. However, demand is a consumer’s desire to purchase a commodity, provided he is willing to spend and has sufficient purchasing power.
Hence, we can say that the four essential elements of demand are:
- Quantity of the commodity
- Willingness of a consumer to purchase the commodity
- Time period
- Price of the commodity at each quantity level
Characteristics of Demand
- Dynamic in nature: Demand is dynamic in nature. It means that demand for a commodity does not remain the same all the time. Different factors affect the demand for a commodity, and hence, an organization has to consider every factor to fulfill the present demand of the consumers.
- Expressed with respect to time period: Demand for a commodity is expressed with reference to time. Even though the price of a commodity is the same, the demand may change in an hour, day, month, or year.
- Depends on price: Demand for a commodity is price sensitive. It means that if the price of a commodity change, its demand will also change. Generally, there is an inverse relationship between the price and demand of a commodity. If the price of a commodity increases, its demand will fall, and vice-versa.
- Depends on supply: Like price, there is an inverse relationship between the supply and demand of a commodity. With a low supply, people get ready to pay any price to get the product.
- Sensitive to the competition: Demand for a commodity is affected by competition in the market. If a manufacturer has a monopoly on a product in the market, its demand will be at its peak, and the company can sell the product at any price they want. However, if there are numerous manufacturers in the market, there will be high competition, and the value of the product will decrease in the market.
Individual and Market Demand
Individual demand for a commodity is the quantity demanded by a consumer and his willingness and ability to purchase at every possible price at a given time period. For example, Ram has a demand of 20 units per month of a commodity X at the rate of ₹50.
Market demand for a commodity is the quantity demanded by all consumers of the market, along with their willingness and ability to pay for the commodity at each possible price during the given time period. For example, there are six consumers of eggs, and their consumption in a month is 10, 20, 25, 30, 40, and 50, respectively. Hence, the market demand for eggs will be 175 eggs.
Determinants of Individual Demand
The demand for a commodity depends on various factors. These factors are as follows:
- Price of the given commodity: The most important factor affecting the demand for a commodity is its price. In general, there is an inverse relationship between the demand and price of a commodity. If the price of a commodity decreases, the quantity demanded will increase, as more people will be willing and able to purchase the commodity. However, if the price of a commodity increases, its demand will decrease because of the fall in consumers’ satisfaction levels. For example, if the price of coffee decreases, people who were not able to afford coffee in the past can now purchase and hence will increase its demand.
- Price of the related goods: The demand for a commodity also depends on the change in the price of the related goods. There are two types of related goods: Substitute goods and Complementary goods.
Substitute Goods: The goods which can be used by a consumer in place of one another to satisfy a particular want are known as substitute goods. If the price of a substitute good increases, then the demand for the given commodity will also increase, and vice-versa. For example, a decrease in the price of a substitute good, tea, will reduce the demand for the given commodity, say coffee.
Complementary Goods: The goods which are used together by a consumer to satisfy a specific want are known as complementary goods. If the price of a complementary good increases, the demand for the given commodity will decrease as they are consumed together by the consumer. For example, a decrease in the price of a complementary good, sugar, will increase the demand for the given commodity (say tea) as the cost of using both products together will be relatively less.
- Income of the consumer: The demand for a commodity also changes with a change in consumer income. However, the effect of income on the demand of a commodity depends on its nature. There are two types of goods: normal and inferior.
Normal Goods: These are the goods whose demand increases with the increase in consumer’s income. For example, if a consumer’s income rises, he will buy more of the normal goods.
Inferior Goods: These are the goods whose demand decreases with the increase in consumer income. For example, if the income of a consumer increases, he will no more purchase the inferior goods, hence, decreasing its demand.
- Expectations of change in the price of a commodity in the future: If the consumer expects that the price of a commodity will increase in the near future, its demand at present will also increase. Hence, there is a direct relationship between a commodity’s expectation of a change in its price in the future and the change in the commodity’s demand at present. For example, if a consumer expects that the price of petrol will decrease in the future, he will not fill his vehicle’s petrol tank at present.
- Tastes and preferences: A consumer’s tastes and preferences for a commodity directly influence his/her demand for that commodity. The tastes and preferences of a consumer include customs, tradition, religion, habit, fashion, etc. For example, if an item of clothing is in trend or fashion, people will be more likely to purchase that particular clothing, increasing its demand.
Determinants of Market Demand
The market demand for a commodity depends on various factors. These factors are as follows:
- Season and weather: The seasonal and weather conditions of a region greatly impact the demand for a commodity. For example, in places like Himachal, the demand for warm clothes is high as compared to summer clothes.
- Distribution of income: The demand for commodities will be high in countries with equitably distributed income. However, the demand for commodities will be low if there is uneven income distribution in a country. Uneven income distribution means either people living in that country are very rich or very poor.
- Size and composition of population: The size of a country’s population highly affects a commodity’s market demand. If the population of a country increases, the market demand will also increase and vice-versa. Besides the number of people living in a country, their composition (such as male-female ratio, older people, youngsters, children, adults, etc.) also affects the market demand. For example, if a country has a large proportion of children, then the market demand for goods like toys, ice cream, chocolates, etc., will be more.