In economics, demand is the quantity of a good consumers are willing and able to purchase at various prices over a given period. In economics, "demand" for a commodity is not the same thing as "desire" for it. It refers to both the desire to purchase and the ability to pay for a commodity.
Demand is always expressed in relation to a range of prices and a particular time period since demand is a flow concept. A flow is any variable expressed per unit of time. Demand refers not to a single isolated purchase, but to a continuous flow of purchases.
Factors influencing demand The factors that influence households' or individual consumers' decision to purchase a commodity are known as the determinants of demand. Some important determinants of demand are:
The price of the commodity: the most important determinant of the demand for a commodity is the price of the commodity itself. Normally there is an inverse relationship between the price of the commodity and its quantity demanded. It implies that the lower the price of the commodity, the larger is the quantity demanded and the higher the price, the lesser is the quantity demanded. This negative relationship is embodied in the downward slope of the consumer demand curve. The assumption of an inverse relationship between price and demand is both reasonable and intuitive. For instance, if the price of a gallon of milk were to increase from $5 to $15, this significant price rise would render the commodity unaffordable for some consumers, thereby leading to a decrease in demand.
Price of related goods: the principal related goods are complements and substitutes. A complement is a good that is used with the primary good. Examples include hotdogs and mustard, beer and pretzels, automobiles and gasoline. (Perfect complements behave as a single good.) If the price of the complement goes up, the quantity demanded of the other good goes down.
Mathematically, the variable representing the price of the complementary good would have a negative coefficient in the demand function. For example, Qd = a - P - Pg where Q is the quantity of automobiles demanded, P is the price of automobiles and Pg is the price of gasoline. The other main category of related goods are substitutes. Substitutes are goods that can be used in place of the primary good. The mathematical relationship between the price of the substitute and the demand for the good in question is positive. If the price of the substitute goes down the demand for the good in question goes down.
Income of the consumer: income of the consumer is the basic determinant of the quantity demanded of a product as it determines the purchasing power of the consumer. Generally, there is a direct relationship between the income of the consumer and his demand for a product, i.e., with an increase in income, the demand for the commodity increases. However, this may not always be the case.
Consumers' tastes or preferences: The greater the desire to own a good the more likely one is to buy the good. There is a basic distinction between desire and demand. Tastes and preferences depend on social customs, habits of the people, fashion, general lifestyle of the people, advertisement, new inventions, etc. Some of these factors like fashion keep on changing, leading to change in consumers' tastes and preferences. As a result, the demand for different goods changes.
Consumers' expectations: consumers' expectations regarding factors such as future prices, income, and availability of goods play a crucial role in determining the demand for goods and services in the present period. For instance, if consumers anticipate a future increase in the price of a commodity, they are likely to demand a greater quantity of that commodity now to avoid paying a higher price later. Similarly, if people expect an increase in their income, they will buy more commodities in anticipation of a rise in their income. In the same way if consumers expect scarcity of certain goods in future on account of their expectation that its production may fall in future due to strike, crop failure, etc., the current demand for such goods would increase.
Consumer-credit facilities: if consumers are able to get credit facilities or they are able to borrow from the banks, they would be tempted to purchase certain good they could not have purchased otherwise. For instance, the demand for cars in India has increased partly because people are able to get loans from the banks to purchase cars.
Demonstration effect: The demonstration effect refers to the tendency of a person to emulate the consumption style of other persons such as their friends, neighbours, etc. For instance, the demand for luxury cars and expensive mobile sets has increased in recent years partly because of the desire of the people to follow the consumption style of others.
Distribution of Income: the distribution of income within a country also affects the demand for goods. If the distribution of income in a country is unequal, there will be more demand for luxury goods like cars and LED televisions. On the other hand, if the income is evenly distributed, there will be less demand for luxury goods and more demand for essential goods (necessities).
Size and composition of population: market demand for a commodity depends on the size and composition of the population. The population size of a country determines the number of consumers. The larger the population, the larger is likely to be the number of consumers. An increase in the size of population will increase the demand for a commodity by increasing the number of consumers and, vice versa.
Climatic factors: demand for different goods depends on the climatic factors because different goods are needed for different climates. For instance, the demand for ice, fans, air conditioners, cold drinks, cotton clothes, etc increases in summer. Likewise, in winter, the demand for heaters, blowers, hot drinks, woollen cloths, etc increases.
Government policy: the economic policy of a government also influences the demand for commodities. If the government imposes taxes on various commodities in the form of VAT, excise duties, etc., the prices of these commodities will increase, and as a result, demand for these commodities will fall.
Demand function equation A demand function states the relationship between the demand for a product and its various determinants. It is a shorthand way of saying that quantity demanded depends on various determinants. It gives functional relationship (i.e., cause and effect relationship) between the demand for a commodity and various factors affecting demand. The algebraic expression of the demand function is given in the form of the following equation: Dn = f (Pn, P1...Pn-1, Y, T, E, H, G...) where 'Dn' denotes the demand for a particular commodity 'n', f shows the functional relation between the demand for the commodity 'n' and the factors affecting its demand, 'Pn' is the price of commodity 'n', 'P1... Pn-1' indicates the price of all other commodities, 'Y' is the income, 'T' stands for the taste, 'E' stands for expectations, 'H' is the size of population, 'G' stands for government's policy. In this demand function, Dn is treated as dependent variable, and all the factors on the right-hand side are treated as independent variables.
Demand curve
Demand curve is a graphical presentation of the "law of demand". The curve shows how the price of a commodity or service changes as the quantity demanded increases. Every point on the curve is an amount of consumer demand and the corresponding market price. The graph shows the law of demand, which states that people will buy less of something if the price goes up and vice versa.
According to Kotler, eight demand states are possible: Negative demand — Consumers dislike the product and may even pay to avoid it. Nonexistent demand — Consumers may be unaware of or uninterested in the product. Latent demand — Consumers may share a strong need that cannot be satisfied by an existing product. Declining demand — Consumers begin to buy the product less frequently or not at all. Irregular demand — Consumer purchases vary on a seasonal, monthly, weekly, daily, or even hourly basis. Full demand — Consumers are adequately buying all products put into the marketplace. Overfull demand — More consumers would like to buy the product than can be satisfied. Unwholesome demand — Consumers may be attracted to products that have undesirable social consequences.Kotler, Philip & Keller, Kevin L. (2015). Marketing Management, 15th Edition. Harlow, Pearson
Price elasticity of demand
The price elasticity of demand is a measure of the sensitivity of the quantity variable, Q, to changes in the price variable, P. It shows the percent by which the quantity demanded will change as a result of a given percentage change in the price. Thus, a demand elasticity of -2 says that the quantity demanded will fall 2% if the price rises 1%. For infinitesimal changes, the elasticity is (∂Q/∂P)×(P/Q).
Elasticity along linear demand curve The slope of a linear demand curve is constant. The elasticity of demand changes continuously as one moves down the demand curve because the ratio of price to quantity continuously falls. At the point the demand curve intersects the y-axis, demand becomes infinitely elastic, because the variable Q appearing in the denominator of the elasticity formula is zero. At the point the demand curve intersects the x-axis, the elasticity is zero, because the variable P appearing in the numerator of the elasticity formula is zero.Colander, David C. Microeconomics 7th ed. pp. 132–133. McGraw-Hill 2008. At one point on a linear demand curve, demand is unitary elastic: an elasticity of minus one. For higher prices, the elasticity is greater than -1 in magnitude: demand is said to be elastic because percentage quantity changes are bigger than price changes. For prices below the point of unit elasticity, the elasticity is less than -1 (-1<Ed<0) and demand is said to be inelastic.
Constant price elasticity demand Constant elasticity of demand occurs when where a and c are parameters, and the constant price elasticity is
Perfectly inelastic demand Perfectly inelastic demand is represented by a vertical demand curve. Under perfect price inelasticity of demand, the price has no effect on the quantity demanded. The demand for the good remains the same regardless of how low or high the price. Goods with (nearly) perfectly inelastic demand are typically goods with no substitutes. For instance, insulin is nearly perfectly inelastic. Diabetics need insulin to survive so a change in price would not effect the quantity demanded. Insulin is not perfectly inelastic, however, as a prohibitively high price would cause some individuals to be incapable of purchasing insulin entirely. On the other hand, if insulin was sold at a very low price, it is possible that some individuals would purchase more insulin if they were not able to afford it before. Because of the effects of extreme pricing, no good can be considered truly perfectly inelastic.
Market structure and the demand curve