WHAT DEMAND IS IN ECONOMICS; DETERMINANTS OF DEMAND (FACTORS INFLUENCING DEMAND)

A. WHAT DEMAND IS IN ECONOMICS

Demand is the quantity of commodity consumers with to purchase and are able to buy at a given price over a given period of time. It may also be defined as the relationship between the various possible prices of a product and the amount of it the consumers are willing and able to buy during some period of time, other things being equal. Demand therefore goes beyond just a desire to have a certain good or service. Desire for a commodity without purchasing power or the ability to pay for, is just a want or wish and not demand. Demand backed by purchasing power and the ability to acquire a commodity at a given time is called ‘effective demand’. Even in a situation where the product is not available for the consumer to buy, in so long as the means is there and the buyer is willing to purchase it, it is effective demand.

There is a relationship between the demand for a commodity and price, at any point in time; this could be shown in the form of a demand schedule, a demand function or a demand curve.

A demand function is a statement telling how each of a number of relevant variables affect the amount of product consumers will buy during some time period. For example, how many umbrellas people will buy in a given market area during a week in a rainy season, may depends on the price of umbrellas, the price of a substitute of umbrella example raincoat and the income of consumers. These variables play a role in what is called a demand function.

The law of demand states that, other things being equal, the amount of product consumers are willing and able to buy during some period of time varies inversely with the price of that product.

A demand schedule is a table showing the relationship between the various possible prices and the quantity purchased of that commodity over some period of time. Below is an individual demand schedule for mango.

Plotting price on vertical axis and quantity demanded on horizontal axis, we obtain the normal demand curve. Due to the inverse relationship between P and Qd, the normal demand curve for mango would slope downwards from left to right. A demand curve is a graphical representation of the demand schedule. A demand curve may or may not be a straight line. We however, normally use straight line demand curves for illustrative purposes.

MARKET DEMAND

The quantity demanded of a commodity by all consumers of the commodity in the market is known as the market demand. To obtain the market demand schedule, we sum the individual demand schedules. Assuming a hypothetical economy in which we have four consumers a, b and c. The market demand schedule can be obtained as in the second table below.

The total demand in the 3rd column gives us the market demand at the given prices. If we plot price on vertical axis and total quantity demanded on horizontal axis, we obtain a demand curve (market demand curve) that slope downwards from left to right. The inverse relationship between price and quantity demanded is also shown in the market demand schedule. That is more is bought at lower prices than at higher prices. The market demand curve slopes downward from left to right because the individual demand curves slope that way. A market demand curve for a product by definition is horizontal sum of the demand curves of the individual consumers in the market.

DETERMINANTS OF DEMAND

The demand for a commodity is influenced by the price of the commodity as well as any demand function variable that will cause a demand curve to shift. These are called the “determinants of demand”.

i. The commodity’s price

In case of almost all commodities, quantity demanded increases as the price of the commodity falls, income, taste and all other prices remaining unchanged. When the price of a commodity is high, only the rich can afford to buy it. The quantity demanded of the market is therefore low. When the price falls, however, those in the low and middle income bracket can also afford. As a result, the quantity demanded will increase.

The real income and substitution effects of price changes also influence the quantity demanded of a product. Real income is the volume or basket of goods nominal income can buy. There is an inverse relationship between real income and price. When price increases real income falls and vice versa. Real income = Nominal income

Price The substitution effect is based on the rationality of the consumer. When the price of a commodity falls, the rational consumer substitutes this commodity for a relatively expensive one. This implies when price falls more would be demanded, and when price increases less would be demanded.

ii. Prices of related commodities

The consumer’s demand for a commodity may be influenced by the prices of related goods. The related goods may be substitutes or complements.

a) Substitutes

Two commodities are substitutes if one can be used in place of the other. Substitute goods need not be consumed together. Example, Milo and bournvita; butter and margarine etc. A fall in the price of one would result in one of the other commodity being bought. This is true when considered the other way round.

b) Complements

Complements or complementary goods are two goods that have the relationship such that having one of them increases the satisfaction received from the other. Example car and car tyres; torchlight and batteries; car and fuel and others. A fall in the price of one may result in an increase in the demand for the other. For instance a fall in the price of cars (probably due to a fall in the demand for cars) would result in fall in the demand for fuel, other things being equal. An increase in the price of cars would result in the reverse effect.

iii. Consumer income

The effect of changes in income on demand could be positive, neutral or negative according to the nature of the commodity in question, which is whether the commodity is a normal good, a necessity or an inferior good. For normal goods, increase in income leads to increase in demand and vice versa. An increase in income reduces demand for inferior goods and decrease in income has the opposite effect. An increase or decrease in the consumer’s income has little or no effect on the demand for necessities. Salt is a good example of a necessity. A normal good is a commodity with a positive income effect, so that consumers buy more of such goods when their real income increases. An inferior good is a commodity with a negative income effect so that as consumers’ real income rise, they buy less o such goods.

iv. Taste or preference

All things being equal, if the consumer has taste or preference for a particular commodity, more of it would be demanded. Taste or preference may be influenced by factors like fashion, weather, customs and traditions, occasions and others. For instance there would be an increase in demand for raincoats and umbrellas in the rainy seasons.

Other factors that influence market demands in particular, are expectation of future changes in price or supply; population size; age distribution /structure; advertisement etc.

An individual Demand Schedule for Mango

Price Per Mango (P)
Quantity Demanded per week (QD)
 
5.0 cents
20
 
4.7 cents
25
 
4.5 cents
30
 
4.2 cents
35
 
4.0 cents
40
 

A Market Demand Schedule

Price ($)
QDa / QDb / QDc
Total Demand (Market Demand)
50
10 / 16 / 20
46
100
8/ 14 / 17
39
150
5 / 10 / 12
27
200
2 / 4 / 8
14
250
1/ 2 / 5
8

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