Demand,and its determinants of demand,law of demand
What is Demand?
Demand is the desire to own anything, the ability to pay for it, and the willingness to pay during a specific period.
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Demand can be represented graphically, as a line with price on the y axis and quantity demanded on the x axis. It can also be represented in a table, known as a demand schedule.
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Price and demand almost always have an inverse relationship. As the price of a good goes up, the demand goes down.
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There are many factors other than price that influence demand. Some examples are tastes and preferences, disposable income, and the price of relate goods.
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demand
The amount of a good or service that consumers are willing to buy at a particular price. -
substitute
A good with a positive cross elasticity of demand. This means a good's demand is increased when the price of another good is increased. -
complement
A good with a negative cross elasticity of demand, in contrast to a substitute good. This means a good's demand is increased when the price of another good is decreased.
Demand
Demand is the desire to own anything, the ability to pay for it, and the willingness to pay during a specific period (Figure 1). In economics, demand refers to how much of a product or service is desired by buyers. The quantity demanded is the amount of a product people are willing to buy at a certain price. The relationship between price and quantity demanded is known as the demand relationship.Economists record demand on a demand schedule and plot it on a graph as a demand curve that is usually downward sloping. The downward slope reflects the relationship between price and quantity demanded: as price decreases, quantity demanded increases. In principle, each consumer has a demand curve for any product that he or she would consider buying. The consumer's demand curve is equal to the marginal utility (benefit) curve. When the demand curves of all consumers are added up, the result is the market demand curve for that product. If there are no externalities, the market demand curve is also equal to the social utility (benefit) curve.
Demand refers to the quantities of a product that purchasers are willing and able to buy at various prices per period of time, "all other things being equal."
Factors Affecting Demand
Innumerable factors and circumstances could affect a buyer's willingness or ability to buy a good. Some of the more common factors are:- Good's own price: The basic demand relationship is between potential prices of a good and the quantities that would be purchased at those prices. Generally, the relationship is negative meaning that an increase in price will induce a decrease in the quantity demanded. This negative relationship is embodied in the downward slope of the consumer demand curve. The assumption of a negative relationship is reasonable and intuitive. If the price of a new novel is high, a person might decide to borrow the book from the public library rather than buy it. Or if the price of a new piece of equipment is high a firm may decide to repair existing equipment rather than replacing it.
- Price of related goods: Related good can be complements or substitutes. A complement is a good that is used with the primary good. Examples include hotdogs and mustard, beer and pretzels, automobiles and gasoline. The price of the complement and demand for the original good have an inverse relationship, so if the price of the complement goes up, the quantity demanded of the other good goes down. The other main category of related goods is substitutes. Substitutes are goods that can be used in place of the primary good - for example, hotdogs and hamburgers. The price of the substitute and the demand for the good in question have a direct relationship. If the price of the substitute goes down the demand for the good in question goes down.
- Personal Disposable Income: In most cases, the more disposable income (income after tax and receipt of benefits) you have the more likely you are to buy.
- Tastes or preferences: The greater the desire to own a good the more likely you are to buy the good. There is a basic distinction between desire and demand. Desire is a measure of the willingness to buy a good based on its intrinsic qualities. Demand is the willingness and ability to put one's desires into effect. It is assumed that tastes and preferences are relatively constant.
- Consumer expectations about future prices and income: If a consumer believes that the price of the good will be higher in the future he is more likely to purchase the good now. If the consumer expects that his income will be higher in the future the consumer may buy the good now. In other words positive expectations about future income may encourage present consumption.
- Population: If the population grows this means that demand will also increase nature of the good. If the good is a basic commodity it will lead to a higher demand
Determinants of Demand
When price changes, quantity demanded will change. That is a movement along the same demand curve. When factors other than price changes, demand curve will shift. These are the determinants of the demand curve.
1. Income: A rise in a person’s income will lead to an increase in demand (shift demand curve to the right), a fall will lead to a decrease in demand for normal goods. Goods who
2. Consumer Preferences: Favorable change leads to an increase in demand, unfavorable change lead to a decrease.
3. Number of Buyers: the more buyers lead to an increase in demand; fewer buyers lead to decrease.
4. Price of related goods:
a. Substitute goods (those that can be used to replace each other): price of substitute and demand for the other good are directly related.
Example: If the price of coffee rises, the demand for tea should increase.
b. Complement goods (those that can be used together): price of complement and demand for the other good are inversely related.
Example: if the price of ice cream rises, the demand for ice-cream toppings will decrease.
5. Expectation of future:
a. Future price: consumers’ current demand will increase if they expect higher future prices; their demand will decrease if they expect lower future prices.
b. Future income: consumers’ current demand will increase if they expect higher future income; their demand will decrease if they expect lower future income.OF
LAW OF DEMAND
MEANING OF DEMAND :-
In ordinary language the word demand means desire . But in economics demand means desire backed up by the enough money to pay for the good. Only desire can not be called demand.
There is also functional relationship between price and demand. Second point is that demand is always per unit of time.
LAW OF DEMAND :- " Other things remaining the same when the price of any commodity increases its demand falls and when price falls its demand increases."
According to the law of demand there is inverse relationship between demand and price.
In simple language was can say that when the price of any commodity falls, people are tempted to purchase more commodities. On the other hand when price of any commodity rises people demand less quantity.
NOTE : No doubt with the fall in price demand increases but it is not necessary that demand may also increases according the same ratio.
The functional relationship between demand and price can also be expressed as under :
qd = F(P)
qd = Quality demanded
F = Function
P = Price of commodity
We can also explain this law by the following schedule and diagram :
DEMAND SCHEDULE :-
The demand schedule of sugar which is purchased in the market at different prices per unit of time is given below :
Price per Kg Quantity demanded in rupees
in rupees in Kg.
10 1000 Kg
8 2000 Kg
6 3000 Kg
4 4000 Kg
2 5000 Kg
EXPLANATION : The above schedule shows that a consumer buys 1000 Kg. sugar 10 rupees per Kg. when price falls to two rupees his demand increases up to 5000 Kg. We can say that if other things remaining the same, a consumer buys more goods at lower price and less goods at higher prices.
DEMAND CURVE : Demand curve is a graphic representation of the demand schedule.
EXPLANATION : In the demand curve, the price is shown on the vertical and quantity demand is plotted on the horizontal axies. The curve DD' demand curve slopes down which shows that price and quantity demanded work in opposite direction.
NEGATIVE SLOPE : Demand curve always moves from left to right and downward. Because with the fall in price demand increases.
ASSUMPTIONS :-
While explaining the law we have stated that other things remaining the same these non-price factors are following :
1. CHANGE IN INCOME :-
There should be no change in income otherwise, rise in price will not cause the reduction in the quantity demanded.
2. CHANGES IN FASHION :-
As the fashion of any commodity changes its demand and price both falls. So the law of demand can not operate in this case.
3. CHANGE IN TASTE :-
Demand for commodity may change due to changes in tastes. For example, people develop a taste for milk. The demand for tea will decrease.
4. CHANGE IN WEATHER :-
Some time due to a sudden change of weather, this law cannot operate.
5. CHANGE IN POPULATION :-
In the population of the country increases, the demand of various goods will rise, even prices are increasing.
6. PRECIOUS AND CHEAP GOODS :-
Cheapest and costly goods demand remains constant. For example salt an diamond demand cannot change due to change in price.
7. INVENTION OF SUBSTITUTES :-
If the cheap and better substitute of any commodity is invented then the demand of that commodity can not rise with the fall in price.
8. CHANGE IN THE DISTRIBUTION OF WEALTH :-
If an equal distribution of wealth brought about in a country, then demand for expensive goods will fall and demand for basic necessities will increase.
9. CHANGES IN THE STATE OF TRADE :-
The total quantity of goods demanded is also affected by the cyclical fluctuations. So in that case this law can not operate.
10. FUTURE EXPECTATIONS :-
Sometimes, people expect that the price of a particular commodity will rise in near future. So they increase their purchases with the rise in price.
11. DEVALUATION EXPECTATION :-
If the people are expecting that currency will be devalued in the near future, then this law will not operate.
Sometimes it can also happen that the demand curve may slope upward from left to right. In other words it may have positively inclined curve. For example if people expect the prices to go up in the near future, they they will purchase more commodities at a higher prices. Similarly some articles have great demand when their prices rises and less demand when price falls. Sometimes people may purchase more commodities at a higher prices due to ignorance.
7 essential exceptions to the Law of Demand
- Sushil Suri
The law of demand does not apply in
every case and situation. The circumstances when the law of demand
becomes ineffective are known as exceptions of the law. Some of these
important exceptions are as under.
1. Giffen goods:
Some special varieties of inferior goods
are termed as Giffen goods. Cheaper varieties of this category like
bajra, cheaper vegetable like potato come under this category. Sir
Robert Giffen or Ireland first observed that people used to spend more
their income on inferior goods like potato and less of their income on
meat. But potatoes constitute their staple food. When the price of
potato increased, after purchasing potato they did not have so many
surpluses to buy meat. So the rise in price of potato compelled people
to buy more potato and thus raised the demand for potato. This is
against the law of demand. This is also known as Giffen paradox.
2. Conspicuous Consumption:
This exception to the law of demand is
associated with the doctrine propounded by Thorsten Veblen. A few goods
like diamonds etc are purchased by the rich and wealthy sections of the
society. The prices of these goods are so high that they are beyond the
reach of the common man. The higher the price of the diamond the higher
the prestige value of it. So when price of these goods falls, the
consumers think that the prestige value of these goods comes down. So
quantity demanded of these goods falls with fall in their price. So the
law of demand does not hold good here.
3. Conspicuous necessities:
Certain things become the necessities of
modern life. So we have to purchase them despite their high price. The
demand for T.V. sets, automobiles and refrigerators etc. has not gone
down in spite of the increase in their price. These things have become
the symbol of status. So they are purchased despite their rising price.
These can be termed as “U” sector goods.
4. Ignorance:
A consumer’s ignorance is another factor
that at times induces him to purchase more of the commodity at a higher
price. This is especially so when the consumer is haunted by the phobia
that a high-priced commodity is better in quality than a low-priced
one.
5. Emergencies:
Emergencies like war, famine etc. negate
the operation of the law of demand. At such times, households behave in
an abnormal way. Households accentuate scarcities and induce further
price rises by making increased purchases even at higher prices during
such periods. During depression, on the other hand, no fall in price is a
sufficient inducement for consumers to demand more.
6. Future changes in prices:
Households also act speculators. When
the prices are rising households tend to purchase large quantities of
the commodity out of the apprehension that prices may still go up. When
prices are expected to fall further, they wait to buy goods in future at
still lower prices. So quantity demanded falls when prices are falling.
7. Change in fashion:
A change in fashion and tastes affects
the market for a commodity. When a broad toe shoe replaces a narrow toe,
no amount of reduction in the price of the latter is sufficient to
clear the stocks. Broad toe on the other hand, will have more customers
even though its price may be going up. The law of demand becomes
ineffective.