Demand concept of demand


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Demand concept of demand

  1. 1. DEMAND CONCEPT OF DEMAND: Ordinarily bydemand is meant the desire or want for something.In economics, however, demand means theeffective desire or want for a commodity backed upby the ability and the willingness to pay for it. Thus, want for a commodity without possessing moneyto buy it or un willingness to pay a given price for itwill not constitute a demand for that commodity.In short, Demand = Desire+ Ability to pay + Will tospend. 1) Demand is always related to price andtime: Demand is a relative concept Demand for acommodity should always have a reference to priceand time . Thus economists always mention theamount of demand for a commodity with referenceto Price and specific time period, such as per day,per week, per month or per year. 2) Demand maybe viewed ex-ante or ex-post: Ex-ante demand isthe intended demand and ex-post demand is whatis already purchased. The former denotes potentialdemand, while the latter refers to the actualmagnitude purchased. 3) Demand may be direct or
  2. 2. derived: Consumer’s demand is a direct demand asit directly yields satisfaction to the consumer.Consumption goods have direct demand.Producer’s demand for factor-inputs is a deriveddemand as it is derived from the demand for thefinal output. All capital goods have derived demand.For example, the demand for a house for dwellingpurpose is a direct demand, while the demands forbricks, cement, wood, architect, mason, carpenter,etc. that are required to build the house are deriveddemands. INDIVIDUAL DEMAND AND MARKETDEMAND: Consumer demand for a product maybe viewed at two levels: 1] Individual demand 2]Market Demand
  3. 3. Individual demand refers to the demand for acommodity from the individual point of view. Thequantity of a good that a consumer would buy at agiven price during a given period of time is hisindividual demand for that particular Good.Individual demand is considered from one person’spoint of view or from that of a family or household’spoint of view. Market demand for a product onthe other hand, refers to the total demand of all thebuyers taken together. How much quantity theconsumers in general would buy at a given priceduring a given period of time constitutes the totalmarket demand for the product. Market demand isthe sum total of individual demands. Aggregating allindividual buyers’ demand in the market derives it.Market demand is more important from the sellers’point of view. Sales depend on the market demand.Business policy and planning are based on themarket demand. Prices are determined on the basisof market demand and not of just an individualdemand for the product. In a competitive market,
  4. 4. interaction between total or market demand andmarket supply determine the equilibrium price.Usually under market mechanism, resources wouldbe automatically channelized in producing thosegoods, which have a greater intensity of marketdemand and consequently, higher prices and moreprofitability. DETERMINANTS OF DEMAND Factorsinfluencing Individual Demand: An individual’sdemand for a commodity is generally determinedby such factors as: 1] Price of the Product:Normally a larger quantity is demanded at a lowerprice than at a higher price. 2] Income: Withincrease in income one can buy more goods. Thus arich consumer usually demands more and amoregoods than a poor consumer. 3] Tastes and Habits:Demand for several products like ice-cream,chocolates, bhel-puri, etc depend on individual’stastes. Demand for tea, betel, tobacco, etc, is amatter of habit. 4] Relative prices of other goods:Relative products such as substitutes andcomplementary goods also determine the demand
  5. 5. for a commodity. If substitutes are relativelycostly, then there will be more demand for thiscommodity at a given price than in case of itssubstitutes are relatively cheaper. When in orderto satisfy a given want, two or more goods areneeded in combination, these goods are referred toas complementary goods. For e.g. car and petrol,pen and ink, tea and sugar, shoes and socks, etc arecomplementary to each other. When the price ofone commodity decreases, the demand for itscomplementary product will tend to increase andvice versa. 5] Consumers Expectations: When aconsumer expects its prices to fall in future, he willtend to buy less at the present prevailing price.Similarly, if he expects its price to rise in future, hewill tend to buy more at present. 6]Advertisement Effect: In modern times, thepreferences of a consumer can be altered byadvertisement and sales propaganda although to acertain extent only. Factors influencing MarketDemand: Market demand is the general demand
  6. 6. pattern of the community of the people at large.The following factors affect the common demandpattern for a commodity in the market. 1) Price ofthe product: At a low market price, market demandfor the product tends to be high and vice versa. 2)Distribution of income and wealth in thecommunity: If there is equal distribution of incomeand wealth, the market demand for many productsof common consumption tends to be greater thanin the case of unequal distribution. 3) Community’sCommon Habits and Scale of Preferences: For e.g.When a large section of population shifts itspreference fromvegetarian foods to non-vegetarianfoods, the demand for the former will tend todecrease and that for the latter will increase. 4)General standards of Living and Spending Habits ofthe People: When people in general adopt a highstandard of living and are ready to spend more,demand for many comforts and luxury items willtend to be higher than otherwise. 5) Number ofBuyers in the Market and the Growth of Population:
  7. 7. The size of market demand for a product obviouslydepends on the number of buyers in the market. Alarge number of buyers will constitute a largedemand and vice versa. 6) Age structure and sex-ratio of the Population: If there is large number ofjuvenile population then the market demand fortoys, schools, etc i.e. goods and services required bychildren will be much higher than the marketdemand for goods needed by the elderly people.Similarly females exceeding males in number wouldmean a greater demand for goods required by thefemale population than the male population. 7)Future Expectations: If buyers in general expect thatprices of a commodity will rise in future, presentmarket demand would be more as most of themwould like to hoard the commodity. The reversehappens if a fall in the future prices is expected. 8)Level of Taxation and Tax Structure: A progressivelyhigh tax rate would generally mean a low demandfor goods in general and vice versa. But a highlytaxed commodity will have a relatively lower
  8. 8. demand than an untaxed commodity- if thathappens to be a remote substitute. 9) Inventionsand Innovations: Introduction of new goods orsubstitutes as a result of inventions and innovationsin a dynamic modern economy tends to adverselyaffect the demand for the existing products, whichas a result of innovations, definitely becomeobsolete. 10)Fashions: For examplee; demand for commodities like jeans, are basedon current fashions. 11)Climate or weatherconditions: For example: in summer, there is agreater demand for cold drinks, fans, coolers etc.Similarly, demand for umbrellas and raincoats areseasonal. 12) Customs: Fro example duringChristmas there is more demand for gifts and cakes.13) Advertisement and Sales Propaganda: Marketdemand for many products in the present day isinfluenced by the sellers’ efforts throughadvertisements and sales propaganda Demand ismanipulated through selling efforts. 14) War
  9. 9. Period: As compared to the normal period, duringwar time, market demand for most goods tends tocontract. This is because people become morepatriotic and are willing to sacrifice more to permitdiversion of resources from civilian use to themilitary sector for strengthening the defenceprogrammes. The government may also borrowon a large scale to meet war expenditure. As aresult, the purchasing power of the publicdecreases. Again, prices may also tend torise on account of the increased war expenditure bythe government. War-time inflation thus impliescurtailment of overall demand for goods in general.