What are aggregate demand and market demand?
Market demand is the demand in the market for particular goods and services. As the market
demand checks the particular goods and services, factors like competitive products can affect the
market demand.
Aggregate demand is the demand for all products and services in an economy. As competing
products should not limit the demand for all goods and services, aggregate demand is based on
just the economic factors and not the individual ones.
Is the demand curve sloping downward?
The demand curve is made by plotting the price on the Y-Axis and the demand on the X-Axis.
The demand curve slopes down. When prices go up, demand goes down and vice-versa.
What is equilibrium price?
Equilibrium price is the market price as the demand and supply meet at the equilibrium price.
The equilibrium price is ever-changing, and the demand and supply factors keep changing. As
the factors change, the equilibrium price changes as well.
A demand function is a mathematical function describing the relationship between a variable,
like the demand of quantity, and various factors determining the demand. The purpose of this
function is to analyze the behavior of consumers in a market and to help firms make pricing
decisions
1 Individual Demand Function
The Individual function of demand means the functional relationship between a particular need
for a product and all the factors that affect it. Moreover, it also explains the relationship between
the market’s direction and its aspects. In addition, companies can calculate this function by using
data on consumer buying behavior, such as surveys, market research, or sales data. Therefore,
this function is derived from individual consumers’ preferences, income, and other
characteristics of individual consumers. Consequently, it helps understand consumer behavior in
response to changes in price.
Formula for individual demand f(x)
Algebraically, the individual function of demand is described as follows:
Dx = f (Px, I, Pr, E, T)
The Demand of Commodity x (Dx)
The function of product x (f)
Price of good or service (Px)
Incomes of buyers (I)
Prices of related goods & services (Pr)
The future expectation of the product (E)
Taste patterns of buyers (T)
2 Market Demand Function
The market function of demand means the existing functional relationship between the need of
the market and the factors affecting the market demand. Besides those factors affecting the
individual demand process, the magnitude, and structure of climatic conditions and income
distribution also affect the demand’s market function.
Subsequently, evaluating this function involves using data on the prices and quantities demanded
by all buyers in the market. Therefore, this data can be obtained from market research, surveys of
buyer behavior, and sales records. Hence, this function evaluates the market stability price and
quantity, which is the point where demand meets supply.
Market Demand Function
Algebraically, the market function of demand is described as follows:
Dx = f (Px, Y, Py, Ep, T, Pp, A, U)
The demand of Commodity x (Dx)
The function of commodity x (f)
Price of good or service (Px)
Incomes of buyers (Y)
Prices of related goods & services (Py)
The Expected future price of the product (Ep)
Taste patterns of users (T)
Number of buyers in the market (Pp)
Distribution of Income (A)
Government Policy (U)
Factors affecting demand
The demand for a good depends on several factors, such as price of the good, perceived quality,
advertising, income, confidence of consumers and changes in taste and fashion.
Assumptions under which law of demand is valid
This law will be applicable only if the below mentioned points are fulfilled.
1. No expectation of future price changes or shortages
2. No change in consumer’s preferences
3. No change in the price of related goods
4. No change in consumer’s income
5. No change in size, age composition and sex ratio of the population
6. No change in government policy
No expectation of future price changes or shortages
The law requires that the given price change for the commodity is a normal one and has no
speculative consideration. That is to say, the buyers do not expect any shortages in the supply of
the commodity in the market and consequent future changes in the prices. The given price
change is assumed to be final at a time.
No change in consumer’s preferences
The consumer’s taste, habits and preferences should remain constant. 4. No change in the
fashion: If the commodity concerned goes out the fashion the buyer may not buy more of it even
at a substantial price is reduced.
No change in the price of related goods
Prices of other goods like substitutes and supportive, i.e., complementary or jointly demanded
products remain unchanged. If the prices of other related goods change, the consumer’s
preferences would change which may invalidate the law of demand.
No change in consumer’s income
Throughout the operation of the law, the consumer’s income should remain the same. If the level
of a buyer’s income changes, he may buy more even at a higher price, invalidating the law of
demand.
No change in size, age composition and sex ratio of the population
For the operation of the law in respect of total market demand, it is essential that the number of
buyers and their preferences should remain constant. This necessitates that the size of population
as well as the age structure and sex ratio of the population should remain the same throughout
the operation of the law.
Otherwise, if the population changes, there will be additional buyers in the market, so the total
market demand may not contract with a rise in price.
No change in government policy
The level of taxation and fiscal policy of the government remains the same throughout the
operation of the law. Otherwise, changes in income-tax, for instance, may cause changes in
consumer’s income or commodity taxes and may lead to distortion in consumer’s preferences
Exception of Law of Demand
There are certain exceptions to the law of demand that with a fall in price, the demand also falls
and there is an increase in demand with an increase in price.
In case of exceptions, the demand curve shows an upward slope and referred to as exceptional
demand curve. Figure shows an exceptional demand curve:
Exceptional of the law of demand
Inferior goods or Giffen goods
Giffen good is a commodity that is unexpectedly consumed more as its price increases. Thus, it
is an exception to the law of demand. In the case of Giffen goods, the income effect dominates
over the substitution effect.
What Is an Inferior Good?
An inferior good is an economic term that describes a good whose demand drops when people's
incomes rise. These goods fall out of favor as incomes and the economy improve as consumers
begin buying more costly substitutes instead.
Consumers ignorance
Consumer ignorance is another factor that motivates people to purchase a commodity at a higher
price, which violates the law of demand. This results out of the consumer biases that a high-
priced commodity is better in quality than a low-priced commodity.
Situations of crisis
Crisis such as war and famine negate the law of demand. During crisis, consumers tend to
purchase in larger quantities with the purpose of stocking, which further accentuates the prices of
commodities in the market. They fear that goods would not be available in the future.
On the other hand, at the time of depression, a fall in the price of commodities does not induce
consumers to demand more.
Future price expectations
When consumers expect a rise in the prices of commodities, they tend to purchase commodities
at existing high prices. For example, speculation of market strategists on an increase in gold
prices in the future induces consumers to purchase higher quantities in order to stock gold.
On the contrary, if consumers expect a fall in the price of a commodity, they postpone the
purchase for the future.
Emergency
What Is Change in Demand?
A change in demand describes a shift in consumer desire to purchase a particular
good or service, irrespective of a variation in its price. The change could be triggered
by other factors like shift in income levels, consumer tastes, or a different price being
charged for a related product but not price
A shift in the demand curve occurs when the whole demand curve moves to the right or left. For
example, an increase in income would mean people can afford to buy more widgets even at the
same price.
The demand curve could shift to the right for the following reasons:
The good became more popular (e.g. fashion changes or successful advertising
campaign)
The price of a substitute good increased.
The price of a complement good decreased.
A rise in incomes (assuming the good is a normal good, with positive YED)
Seasonal factors.
Factors for the shift in demand curve leftward
When income of the consumer falls
When the price of substitute decreases
When the substitute of complimentary goods increases
When taste of the consumer shifts against the commodity due to change in fashion or
climate
Complementary goods are products that are typically used together. They are goods that people
tend to buy at the same time because they go well together or enhance each other's use