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Understanding Demand and Its Determinants

Demand refers to the quantity of a commodity that consumers are willing and able to buy at various prices over a specific time period, with individual and market demand being key distinctions. Factors influencing demand include the price of the commodity, prices of related goods, consumer income, tastes and preferences, and future price expectations. The law of demand states that there is an inverse relationship between price and quantity demanded, with shifts in the demand curve occurring due to changes in factors other than the commodity's own price.

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18 views6 pages

Understanding Demand and Its Determinants

Demand refers to the quantity of a commodity that consumers are willing and able to buy at various prices over a specific time period, with individual and market demand being key distinctions. Factors influencing demand include the price of the commodity, prices of related goods, consumer income, tastes and preferences, and future price expectations. The law of demand states that there is an inverse relationship between price and quantity demanded, with shifts in the demand curve occurring due to changes in factors other than the commodity's own price.

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ajaarush07
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© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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CH-3.

DEMAND

DEMAND:- Demand is the quantity of a commodity that a consumer is willing and able to buy, at each possible
price during a given period of time.

Demand for a commodity may be either with respect to an individual or to the entire market.
1. Individual demand refers to the quantity of a commodity that a consumer is willing and able to buy, at
each possible price during a given period of time.
2. Market demand refers to the quantity of a commodity that all consumers are willing and able to buy, at
each possible price during a given period of time.

3.2 DETERMINANTS OF DEMAND (INDIVIDUAL DEMAND)


Demand for a commodity increases or decreases due to a number of factors. The various factors affecting
demand are discussed below:
1. Price of the Given Commodity: It is the most important factor affecting demand for the given commodity.
Generally, there exists an inverse relationship between price and quantity demanded. It means, as price
increases, quantity demanded falls due to decrease in the satisfaction level of consumers.

The following determinants are termed as 'other factors' or 'factors other than price'.

2. Price of Related Goods: Demand for the given commodity is also affected by change in prices of the
related goods. Related goods are of two types:
(i) Substitute Goods: Substitute goods are those goods which can be used in place of one another, like tea
and coffee. An increase in the price of substitute leads to an increase in the demand for given commodity
and vice-versa. For example, if price of a substitute good (say, coffee) increases, then demand for given
commodity (say, tea) will rise as tea will become relatively cheaper in comparison to coffee. So, demand
for a given commodity is directly affected by change in price of substitute goods.
(ii) Complementary Goods: Complementary goods are those goods which are used together, like tea and
sugar. An increase in the price of complementary good leads to a decrease in the demand for given
commodity and vice-versa. For example, if price of a complementary good (say, sugar) increases, then
demand for given commodity (say, tea) will fall as it will be relatively costlier. So, demand for a given
commodity is inversely affected by change in price of complementary goods.
3. Income of the Consumer: Demand for a commodity is also affected by income of the consumer. However,
the effect of change in income on demand depends on the nature of the commodity under consideration.
• If the given commodity is a normal good, then an increase in income leads to rise in its demand, while a
decrease in income reduces the demand.
• If the given commodity is an inferior good, then an increase in income reduces the demand, while a
decrease in income leads to rise in demand.
Example: Suppose, income of a consumer increases. As a result, the consumer reduces consumption of
toned milk and increases consumption of full cream milk. In this case, 'Toned Milk' is an inferior good for
the consumer and 'Full Cream Milk' is a normal good.
4. Tastes and Preferences: Tastes and preferences of the consumer directly influence the demand for a
commodity. They include changes in fashion, customs, habits, etc. If a commodity is in fashion or is
preferred by the consumers, then demand for such a commodity rises. On the other hand, demand for a
commodity falls, if the consumers have no taste for that commodity.

5. Expectation of Change in the Price in Future: If the price of a certain commodity is expected to increase in
near future, then people will buy more of that commodity. There exists a direct relationship between
expectation of change in the prices in future and change in demand in the current period. For example, if
the price of petrol is expected to rise in future, its present demand will increase.

DETERMINANTS OF MARKET DEMAND


1. Size and Composition of Population: Market demand for a commodity is affected by size of population in
the country. Increase in population raises the market demand, while decrease in population reduces the
market demand.
Composition of population, i.e. ratio of males, females, children and number of old people in the
population also affects the demand for a commodity. For example, if a market has larger proportion of
women, then there will be more demand for articles of their use such as lipstick, sarees, etc.
2. Season and Weather: The seasonal and weather conditions also affect the market demand for a
commodity. For example, during winters, demand for woollen clothes and jackets increases, whereas,
market demand for raincoat and umbrellas increases during the rainy season.

3. Distribution of Income: If income in the country is equitably distributed, then market demand for
commodities will be more. However, if income distribution is uneven, i.e. people are either very rich or
very poor, and then market demand will remain at lower level.

LAW OF DEMAND
Law of demand states the inverse relationship between price and quantity demanded, keeping other factors
constant.
Assumptions of Law of demand
While stating the law of demand, we use the phrase 'keeping other factors constant or ceteris paribus'. This
phrase is used to cover the following assumptions on which the law is based:
1. Prices of substitute goods do not change.
2. Prices of complementary goods remain constant.
3. Income of the consumer remains the same.
4. There is no expectation of change in price in the future.
5. Tastes and preferences of the consumer remain the same.
Reasons for Law of Demand
Let us now try to understand, why does the law of demand operate, i.e. why does a consumer buy more at
lower price than at a higher price.
The various reasons for operation of Law of Demand are:
1. Substitution Effect: Substitution effect refers to substituting one commodity in place of other when it
becomes relatively cheaper. When price of the given commodity falls, it becomes relatively cheaper as
compared to its substitute. As a result, demand for the given commodity rises:
For example, if price of given commodity (say, Pepsi) falls, with no change in price of its substitute (say,
Coke), then Pepsi will become relatively cheaper and will be substituted for coke, i.e. demand for Pepsi will
rise.
2. Income Effect: Income effect refers to effect on demand when real income of the consumer changes due to
change in price of the given commodity. When price of the given commodity falls, it increases the
purchasing power (real income) of the consumer. As a result, he can purchase more of the given
commodity with the same money income.
For example, suppose Isha buys 4 chocolates @ Rs.10 each with her pocket money of Rs.40. If price of
chocolate falls to Rs.8 each, then with the same money income, Isha can buy 5 chocolates due to an
increase in her real income.
3. Additional Customers: When price of a commodity falls, many new consumers, who were not in a position
to buy it earlier due to its high price, starts purchasing it. In addition to new customers, old consumers of the
commodity start demanding more due to its reduced price.

4. Different Uses: Some commodities like milk, electricity, etc. have several uses, some of which are more
important than the others. When price of such a good (say, milk) increases, its uses get restricted to the
most important purpose (say, drinking) and demand for less important uses (like cheese, butter, etc.) gets
reduced. However, when the price of such a commodity decreases, the commodity is put to all its uses,
whether important or not.

MOVEMENT ALONG THE DEMAND CURVE (CHANGE IN QUANTITY DEMANDED

When quantity demanded of a commodity changes due to a change in its price, keeping other factors
constant, it is known as change in quantity demanded. It is graphically expressed as a movement along the
same demand curve.

There can be either a downward movement (Expansion in demand) or an upward movement (Contraction in
demand) along the same demand curve.

Let us now understand the meaning of Expansion and Contraction in demand.

Expansion in Demand

Expansion in demand refers to a rise in the quantity demanded due to a fall in the price of commodity, other
factors remaining constant.

• It leads to a downward movement along the same demand curve.

• It is also known as 'Extension in Demand' or 'Increase in Quantity Demanded'.

Contraction in Demand

Contraction in demand refers to a fall in the quantity demanded due to a rise in the price of commodity, other
factors remaining constant.

• It leads to an upward movement along the same demand curve.

• It is also known as 'Decrease in Quantity Demanded'.

SHIFT IN DEMAND CURVE (CHANGE IN DEMAND)


When the demand of a commodity changes due to change in any factor other than the own price of the
commodity, it is known as change in demand. It is expressed as a shift in the demand curve.

Various Reasons for Shift in Demand Curve:

(i) Change in price of substitute goods;

(ii) Change in price of complementary goods;

(iii) Change in income of consumers;

(iv) Change in tastes and preferences;

(v) Expectation of change in price in future;

Increase in Demand

Increase in Demand refers to a rise in the demand of a commodity caused due to any factor other than the
own price of the commodity. In this case, demand rises at the same price or demand remains same even at
higher price.

Decrease in Demand

Decrease in Demand refers to a fall in the demand of a commodity caused due to any factor other than the
own price of the commodity. In this case, demand falls at the same price or demand remains same even at
lower price. It leads to a leftward shift in the demand curve.

SUBSTITUTE GOODS AND COMPLEMENTARY GOODS


Change in Prices of Substitute Goods

A change (increase or decrease) in the price of substitutes directly affects the demand for a given commodity.

(i) Increase in Price of Substitute Goods: When price of substitute goods (say, coffee) rises, demand for
the given commodity (say, tea) also rises from OQ to OQ1 at its same price of OP. It leads to a rightward
shift in the demand curve of the given commodity from DD to D1D1.
(i) Decrease in Price of Substitute Goods: With decrease in price of substitute goods (coffee), demand for
the given commodity (tea) also decreases from OQ to OQ1 at the same price of OP. It shifts the
demand curve of the given commodity towards left from DD to D1D1.

Demand curve of given commodity (tea) shift towards left from DD to D,D, due to decrease in price of its
substitute (coffee) at the same price OP

Change in Price of Complementary Goods

An increase or decrease in the prices of complementary goods inversely affects the demand for the given
commodity.

(i) Increase in Price of Complementary Goods: When price of complementary goods (say, sugar) rises, demand
for the given commodity (say, tea) falls from OQ to OQ1 at the same price of OP. As a result, the demand
curve of the given commodity shifts to the left from DD to D1D1

(ii) Decrease in Price of Complementary Goods: With decrease in price of complementary goods (sugar),
demand for the given commodity (tea) increases from OQ to OQ1 at the same price of OP. As a result, the
demand curve of the given commodity shifts to the right from DD to D1D1.
Change in Income (Normal Goods)

A change (increase or decrease) in the income of consumer directly affects the demand for a given
commodity.

(i) Increase in Income: As income rises, the demand for normal goods (say, TV) also rises from OQ to OQ1 at
the same price of OP. It leads to a rightward shift in the demand curve of normal good from DD to D1D1.

(ii) Decrease in Income: With fall in income, the demand for normal goods (TV) falls from OQ to OQ! at the
same price of OP. It shifts the demand curve of normal good towards left from DD to D1D1

Common questions

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A shift in the demand curve occurs due to changes in factors other than the price of the commodity itself. The main factors include: changes in the price of substitute goods (an increase in a substitute's price leads to an increased demand and rightward shift for the commodity), changes in the price of complementary goods (an increase in a complementary good's price leads to decreased demand and leftward shift for the commodity), changes in consumers' income (increased income raises demand for normal goods and shifts the curve to the right), changes in consumers' tastes and preferences, and expectations of future price changes .

The prices of complementary goods inversely affect the demand for a given commodity. If the price of a complementary good rises, the demand for the related commodity tends to decrease because the total cost of using paired goods increases, making them less attractive. For example, if the price of sugar increases, the demand for tea might fall since both are often consumed together. Conversely, a decrease in the price of the complementary good can increase the demand for the primary commodity, shifting the demand curve to the right .

A shift in demand refers to a change in demand due to factors other than the commodity's own price, such as changes in consumer income or the prices of related goods. This results in a shift of the entire demand curve to the left or right. In contrast, a movement along the demand curve is caused solely by a change in the commodity's price, leading to a contraction or expansion of demand. The former is a result of changing market conditions, while the latter is a direct response to price changes, reflecting the law of demand .

An increase in consumer income typically raises the demand for normal goods because consumers have more purchasing power and tend to buy more of these preferred goods . Conversely, for inferior goods, an increase in income reduces the demand as consumers might opt for higher-quality or more desirable alternatives. For example, full cream milk, a normal good, sees increased demand with rising income, whereas the demand for toned milk, an inferior good, declines as consumers switch to more preferred alternatives .

Season and weather conditions influence market demand by altering the immediate needs and preferences of consumers. For instance, during the winter season, there is an increased demand for woollen clothes and jackets due to colder weather conditions. Similarly, the rainy season elevates the demand for raincoats and umbrellas. These seasonal variations necessitate adjustments in production and supply to meet the temporary shifts in demand .

The law of demand operates due to substitution and income effects. The substitution effect occurs when a price decrease makes a good relatively cheaper compared to substitutes, increasing its demand. For example, if the price of Pepsi falls, it may replace Coke as a preferred choice, raising demand for Pepsi . The income effect arises when a price decrease effectively increases consumers' purchasing power, allowing them to buy more of the good. For instance, if the price of chocolates drops, a consumer's money can purchase more chocolates, enhancing demand for them . These effects collectively explain why lower prices generally lead to higher demand.

The composition of a population significantly affects market demand. If a market has a higher proportion of a particular demographic group, the demand for products used by that group increases. For example, a higher proportion of women in the population may lead to greater demand for products like lipstick and sarees. Therefore, understanding the population composition helps to predict and respond to changes in market demand effectively .

A fall in the price of a good results in an expansion of demand due to the principle of increased affordability, which prompts consumers to buy more of the good. This movement along the demand curve is characterized by a downward shift, as consumers respond to the lower price by increasing their consumption. It is important to note that this expansion, also known as an 'extension in demand,' occurs with all other factors held constant .

The distribution of income critically shapes market demand. When income is uniformly distributed across a population, there tends to be higher aggregate demand because more individuals can afford a variety of goods, boosting overall consumption levels. Conversely, if income is unevenly distributed, with significant numbers being either very rich or very poor, demand tends to focus on luxury goods for the affluent, while essential goods may not see equivalent increases in demand due to affordability constraints for lower-income consumers. This uneven distribution can result in less overall market demand compared to scenarios with equitable income distribution .

When consumers anticipate future price increases, they are likely to increase their current demand for the commodity to avoid higher costs in the future. This creates a direct relationship between price expectations and current demand levels. For example, if people expect petrol prices to rise shortly, the present demand for petrol will increase as consumers purchase more now to circumvent future expenses .

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