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DEMAND DETERMINANTS

Demand Function

What is Demand?
Demand for a commodity refers to the desire
backed by willingness and ability to buy a
particular commodity, in a given period of
time.

Meaning of Demand
The amount the buyers are willing to
purchase at a given price and over a given
period of time.
It means effective desire or want for a
commodity, which is backed up by the
ability (i.e., money or purchasing power)
and willingness to pay for it.
In short, Demand= Ability to pay (Money
or Purchasing power) + will to spend

TYPES OF DEMAND

Categories have been made on the basis of


the nature of commodity demanded
(consumer goods & capital goods); time
unit for which it is demanded (short run &
long run); relation between two goods, etc.

Direct & Derived Demand


When a commodity is demanded for its own
sake by the final consumer it is known as
consumer good and its demand is Direct
Demand.
When a commodity is demanded for using
it either as a raw material or as an
intermediary for value addition in any other
good or in the same good, it is known as a
capital good, and its demand is Derived
Demand.

For Example,

If demand for buildings increased, demand


for construction materials like cement,
concrete and bricks will also increase; thus
demand for construction material is derived
by the demand for new buildings.

Recurring & Replacement


Demand

Consumer goods can be further divided into


consumable & durable categories.
Consumable goods have recurring demand,
i.e., they are consumed at frequent intervals,
like we eat food thrice a day, take tea &
snacks frequently.
Demand is per unit of time, therefore
producers of such goods know that
consumers make purchases on short term
basis; hence pricing should be done
accordingly

Replacement Demand
Goods like Television, Machinery, watches,
furnitures are the eg of durable consumer
goods; they are purchased to be used for a
long period of time
Due to use or obsolescence of technology;
thus they need replacement.
All capital goods like machinery also need
Replcement.

Complementary & Competing


Demand
Goods which create joint demand are
complimentary goods, therefore demand
for one commodity is dependent upon
demand for the other one.
For eg., pen & Ink, or printer & Ink
cartridge, or computer & software, or car &
petrol
When more than one commodity is
demanded to satisfy a single want, such
demand is called joint or complementary
demand

Competing demand
There are goods which compete with each
other because they are substitutes.
If you are thirsty you may opt for water, or
coke, or pepsi or juice
Because they can independently satisfy
your want to quench thirst.
When a consumer is indifferent between
two goods, they are called as close
substitutes.

Individual & Market Demand


Demand for an individual consumer is
normally expressed as individual demand.
A seller is not interested in an individual
consumers demand, but in the total market
demand for its product i.e., demand by all
the consumers for its product, known as
Market Demand
For future planning, even economic
planners and governments are also
interested in industry demand, i.e., demand
for the product of all the firms in the
industry

For Eg.,
Your demand for Indica is an example of
individual demand.
The total sale of Indica in a year, 2010, is
the annual market demand,
Total demand for cars in a year is industry
demand for one year.

Factors Influencing Demand:


Price of the Product:
Demand = ability to pay+willingness to pay
Price has a negative effect on demand.
If the price of the product increases, its
quantity demanded will fall.
Alternatively, if the price of the product
increases, its quantity demanded will fall.

Factors contd..,
Income of the Consumers:
Demand is depending upon the paying
capacity of the consumer.
Income bears the positive relationship with
demand,
When income increases demand also
increases due to paying capacity of the
consumer.

Factors contd..,
Price of related goods:
Demand for a commodity not only depends
on the price of that particular commodity,
but also on the price of other related
commodities.
Eg: car & petrol, Tea & coffee

Factors contd..,
Tastes & preferences:
Age, gender, education, profession, social
cultural norms, advertising etc., play a role
in developing tastes & preferences.
For example, cars & gifts industry has
gained significantly due to
internationalization of events like Valentine
day, Friendship day etc..,

Factors contd..,
Advertising:
Firms incur heavy expenditure on
advertising to general awareness about the
features, price, and uniqueness of their
products.
The primary motive behind advertising is to
stimulate demand for own brand.
For Eg., vodafone

Factors contd..,
Consumers Expectation of Future Income
and Price:
Consumers do not make purchases only on
the basis of current income & current price
structure.
In case of durables, when demand can be
postponed, customers decide their purchase
on the basis of future price & income

Factors contd..,
Population:
If the population of a country is constantly
increasing, more food items and other
goods and services will be needed to satisfy
the needs of the people

Factors contd..,
Growth of Economy:
If an economy is growing, it will have
increased demand for goods of better
quality.
Consumers will have higher paying
capacity and greater willingness to pay
higher price for quality.

Demand Function

When we express the relation between


demand & its determinants mathematically,
the relationship is known as demand
function.Dx= f(Px, Y, Po, T, A, Ef, N)
Price of a commodity X (px)
Income of the consumer (Y)
Price of related (Substitutes or complements)
commodities (Po)
Taste & Preference of the consumer (T)
Advertising (A)
Future Expectations (Ef)
Population and economic growth (N)

Law of Demand
The Law of Demand indicates the
relationship between the price of a
commodity and the quantity demanded in
the market.
It means that a person will purchase more of
a commodity when its price falls and he will
purchase less of it when its price rises.

Definition of Law of Demand


Marshall defined,
the amount demanded increases with a fall
in price and diminishes with a rise in price.

The Law of Demand

The law of demand holds that other things


equal, as the price of a good or service rises, its
quantity demanded falls.
The reverse is also true: as the price of a good or
service falls, its quantity demanded increases.

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Demand Curve

The demand curve has a negative slope, consistent with


the law of demand.
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Why does the demand curve


slope downwards?
The demand curve slope downwards from
left to right.
This is because of the inverse relationship
between the price & quantity demanded.

The reasons are:


Operation of the Law of Diminishing
Marginal Utility:
The additional units consumed or purchased
give lesser and lesser utility.
The consumer will not buy a large quantity
unless the price is low.
The law of demand is merely a corollary
from the law of diminishing marginal
utility.

Income Effect:
The fall in the price is equivalent to an
increase in the income of the consumer
and this gives the effect of increase in real
income for him to purchase more.

Substitution Effect:
If the price of a commodity falls, it will be
substituted for costlier things and so the
quantity demanded will go up.

Exceptions to the Law of


Demand

Giffen Goods:
Robert Giffen discovered that the poor
people will demand more of inferior goods
if their prices rise & demand less if their
prices fall.
They reduce the expenditure on other
superior items, to conserve their little
income, & demand more of the inferior
commodity
Giffen goods means Inferior goods

Demand for necessaries:


Irrespective of price changes, people have
to consume the minimum quantities of
necessary commodities.
Eg: petrol

Speculative goods:
In the speculative market, particularly in
stocks & shares, more will be demanded
when the prices are rising and less will be
demanded when the price declines.

Snob Appeal:
Opposite to Giffen goods, (veblen goods)
there are certain goods which have snob
value, for which the consumer measures the
satisfaction derived from these commodities
not by their utility value, but by social
status.
Thus in this case, price & quantity move in
the same direction.
Eg: Diamond or antique works of art, latest
model mobile phones, sport cars,

Future Expectation of prices:


People will become panicky and buy more
when prices are rising.
When there is hyper-Inflation people will
demand more & more; fearing that prices
would still further go up.

Insignificant proportion of Income spent:


Things of very low value & limited use like
salt & matchbox do not show any impact of
price on their demand.

Demand Schedules

Demand schedule is a table or statement


showing how much of a commodity is
demanded (purchased) in a particular
market at different prices

SUPPLY

Supply means the quantity of goods offered


for sale at a particular price at a certain
point of time.

Supply always relates to a price.

Determinants of Supply
Production technology
Price factors of production
Prices of other products
Future price expectations

Definition of supply

Supply has been defined as other things


equal, the quantity supplied of a commodity
increases when the price increases and the
quantity supplied of a commodity decreases
when the price decreases.

The Law of Supply


The law of supply holds that other things equal,
as the price of a good rises, its quantity
supplied will rise, and vice versa.
Why do producers produce more output when
prices rise?

They seek higher profits


They can cover higher marginal costs of production

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Supply Curve

The supply curve has a positive slope, consistent with


the law of supply.
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Equilibrium

In economics, an equilibrium is a situation in


which:
quantity demanded equals quantity supplied, and
the market just clears.

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Equilibrium

Equilibrium occurs at a price of $3 and a quantity of 30


units.
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