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

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.

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.

OnlineTexts.com p. 14

Demand Curve

The demand curve has a negative slope, consistent with the law of demand.
OnlineTexts.com p. 15

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

OnlineTexts.com p. 19

Supply Curve

The supply curve has a positive slope, consistent with the law of supply.
OnlineTexts.com p. 20

Equilibrium

In economics, an equilibrium is a situation in which:

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

OnlineTexts.com p. 21

Equilibrium

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

OnlineTexts.com p. 22