UNIT-II DEMAND ANALYSIS

Meaning of Demand
The word 'demand' is so common and familiar with every one of us that it seems
unnecessary to define it. The need for precise definition arises simply because it is sometimes
confused with other words such as desire, wish, want, etc. it is significant to know about
demand. Generally, people refer to the want or the desire for a thing as demand. But more
desire for a thing is not demand in economics. However, demand in economics necessitates
three things, such as:

✓ Desire for a commodity

✓ Willingness to buy and
✓ The purchasing power to pay or ability to pay

In economics, mere desire should not be called demand. The desire should be backed by
necessary purchasing power (Money). From the time of classical economists till Alfred
Marshall published his “Principles of Economics”, the economists were of the opinion that the
value of a good or services depended upon the labour component value involved in the
production of that good or service. Marshall for the first time proved that the value of a that
commodity or service.

In short, the demand refers to ‘the quantity of a good or service that consumers are willing
and able to purchase at various prices during a period of time’. Or ‘by demand, we mean the
various quantities of a given commodity or service which consumers would buy in one market
in a given period of time, at various prices, or at various incomes, or at various prices of related
goods’.

Definition of Demand

o According to Alfred Marshall, states that “The greater the amount to be sold, the smaller
must be the price at which, it is offered in order that it may find purchasers: or, in other
words, the amount demanded increases with a fall in price and diminishes with rise in
price”.
o According to Prof. Benham, “The demand for anything at a given price is the amount
of it which will be bought per unit of time at that price”.
o According to Chapma, “Demand is the quantitative expression of preferences”
 o According to Hibdon, “Demand means the various quantities of a good that would be
purchased per time period at different prices in a given market”

From the above definitions, we can say that demand is always for a definite quantity at a
price and for a given period of time. Further demand is always related to price and expressed
in terms of quantity at a particular price. Moreover, the demand changes with time.

Features of Demand

I. Demand depends upon utility of the commodity. A consumer is rational and demands
only those commodities which provide utility.
II. Demand always means effective demand, i.e. demand for a commodity or the desire to
own a commodity should always be backed by purchasing power and willingness to
spend it.
III. Demand is a flow concept, i.e. so much per unit of time.
IV. Demand means demand for final consumer goods
V. Demand is a desired quantity. It shows consumer’s wish or need to buy the commodity.

The Demand Function

The demand function, which shows the functional relationship between the demand for
a commodity and its several determinants, can be written as below:

Dx = f {Px, Ps, M, T, W, …...N}

Where,

Dx = The quantity demanded of good X

Px = Price of good X

Ps = Price of related goods

M = Money income of the consumers

T = Tastes and preferences of the consumers

W = Wealth of the consumers

N = The Number of factors

 The quantity of good X demanded varies inversely with P x while Ps , M, T and W are
held constant. A simple and commonly used demand function is

Dx = f {Px}

Which shows that the demand for a commodity is the function of its price.

Demand Schedules and Demand Curves

Demand schedule is a table or statement showing how much of a commodity is

demanded in a particular market at different prices. In other words, demand schedule refers to
the response of amount demanded to change in price of commodity. It summarises the
information on prices and quantity demanded.

Economists commonly speak of two types of Demand Schedules:

A. Individual Demand Schedule

B. Market Demand Schedule

A. Individual Demand Schedule:

It shows the quantities demanded by an individual at different prices, considering other

things being equal. It refers to the series of quantities he is prepared to buy at different prices.
This can be illustrated with the help of a table. The following is an imaginary demand schedule
of a consumer for Ice Cream.

Price of Ice cream (Rs) Quantity Demanded (Units)

(Px) (Dx)
1 5
2 4
3 3
4 2
5 1

From the above table, it is seen that as the price of ice cream goes on increasing, the
quantity demanded goes on falling. when price is Rs.5 per cup, then the consumer demands
one cup but when the price falls to Rs.1 per cup, the demand for the consumer goes up to 5
cups. Thus, we can conclude that as the price falls the demand increases and as the price raises
the demand decreases. Hence, there exists an inverse relationship between the price and
quantity demanded.

Individual Demand Curve:

It refers to the quantity demanded by the consumer at different levels of prices. In fact,
demand curves are only a graphical representation of demand schedule. The relation between
the price and the amount bought can be plotted on a diagram as a demand curve. It is usual to
measure quantity demanded on X axis and price on Y axis.
The imaginary demand curves based on the imaginary schedule will be always slope
downwards to the right indicating that more quantities will be bought at a lower price than at a
higher price with other conditions of demand remaining the same.

In the above figure OX axis measures the different quantities of Ice Cream demanded
and OY axis refer price per unit of Ice Cream. DD is the demand curve. At the price of Rs. 5,
the quantity demanded is 1. As the price falls to Rs.1, the quantity demanded increases to 5.
Moreover, the demand curve slopes downward from left to right which indicates that there is
inverse correlation between price and quantity demanded.

B. Market Demand Schedule

Market demand schedule refers to different quantities of a commodity that all other
consumers in the market are ready to buy at different possible prices of the commodity at a
point of time. It is summation of demanded of all persons of a homogeneous commodity.
Basically, the market demand schedule depicts the functional relationship between the list of
prices and quantity demanded.

Suppose that the market for oranges consists of four consumers, the market demand is
calculated as follows:
 Market Demand Schedule for Oranges

Price of C’s D’s

A’s B’s Aggregated
Oranges (Rs) Demand Demand
Demand Demand Market Demand
(Px)
25 1 2 0 0 3
20 2 4 1 0 7
15 3 5 2 1 11
10 4 5 3 2 14
5 5 5 4 3 17

Consumer A is our average consumer. Consumer B is probably a rich consumer. On

the other hand, consumer C and D are poor. They start demanding at only low prices. This
method of estimating market demand will be accurate but is obviously bulky. For, there are not
four consumers in a market for a product, but thousands and often millions of consumers. It
will be a problem to add up the demands of millions of consumers.

Determinants of Demand / Factors Affecting Demand

There are a number of factors which influence household demand for a commodity. Important
among these are:

1. Price of the Commodity: Ceteris Paribus i.e. Other things being equal, the demand of
a commodity is inversely related to its price. It implies that a rise in price of a
commodity brings about a fall in its purchase and vice-versa. This happens because of
income and substitution effects.
2. Price of Related Commodity: Related commodities are of two types: a)
Complementary Goods and b) Competing Goods or Substitutes Goods.
a) Complementary Goods: are those goods which are consumed together or
simultaneously. For example, Tea and Sugar, Automobiles and Petrol, Pen and Ink
are used together. When commodities are complements, a fall in the price of one
(Other things being equal) will cause the demand of the other to rise. The reverse
will be the case when the price of a complements rises.
b) Competing Goods or Substitutes Goods: are those goods which can be used with
ease in place of one another. For example, Tea and Coffee, Ink Pen and Ball Pen
are substitutes for each other and can be used in place of, one another easily. When
goods are substitutes a fall in the price of one leads to a raise in the quantity
 demanded of its substitutes. For example, if the price of Tea falls, people will try to
substitute it for Coffee and demand more of it.
3. Income of the Consumer: Other things being equal, Generally, there is direct relation
between income of the consumer and his demand. The demand for normal goods rises,
with and increase in income and falls with a fall in income. In the case of inferior goods,
the demand falls with an increase in income and rises with decrease in income. In the
case of necessary good, demand initially increases and then becomes constant.
4. Tastes and Preference of Consumers: The demand for a commodity also depends
upon tastes and preference of consumers and changes in them over a period of time.
Goods which are more in fashion command higher demand than goods which are out
of fashion. Consumers may even discard a good even before it is fully utilised and
prefer another good which is in fashion. For example, there is a greater demand for
coloured television and more and more people are discarding their black and white
television. This factor influences the demand to greater extent. They include fashion,
habits, customs, advertisement, climate and new inventions etc.
5. Distribution of Wealth: The amount demanded of a commodity is also influenced by
the distribution of wealth in the society. If there is an equal distribution of income in
the society, the demand will be higher and in case of inequality, demand will be less.
6. Government Policy: This is also responsible in influencing the demand for the
commodity. The Government imposes taxes on various goods that leads to an increase
in the price of the goods as a result of which demand goes down.
7. Population Growth: The growth of population is another determinant. Increase in
population leads to an increase in demand for all type of goods, whereas decrease in
population means less demand for such commodities. Moreover, composition of
population also affects the demand.
8. Expectations of Consumers about the Future: if a consumer anticipates a rise in
prices in the near future, they will start demanding larger quantities of the particular
product and vice versa. But this condition may be only temporary.