The concept ‘demand’ refers to the quantity of a good or service that consumers are willing and able to purchase at various prices during a period of time. It is to be noted that demand in economics is something more than desire to purchase though desire is one element of it. A beggar, for instance, may desire food, but due to lack of means to purchase it, his demand is not effective. Thus effective demand for a thing depends on (i) desire, (ii) means to purchase and (iii) on willingness to use those means for that purchase. Unless demand is backed by purchasing power of ability to pay, it does not constitute demand. Two things are to be noted about quantity demanded. One is that quantity demanded is always expressed at a given price. A different prices different quantities of a commodity are generally demanded. The second thing is that quantity demanded is a flow. We are concerned not with a single isolated purchase, but with a continuous flow of purchases and we must therefore express demand as so much per period of time-one thousand dozens oranges per day, seven thousand dozen oranges per week and so on.
Determinents for demand?
There are a number of factor which influence house-hold demand for a commodity. Important among these are:
Price of the commodity.
Prices of other related commodities.
Level of income of the household.
Tastes and preferences of consumers.
Size and composition of population.
Distribution of income.
Other factors.
We shall now discuss the various determinants of demand and find their relationship with it.
Price of the commodity: Other things begin equal, the demand of a commodity is inversely related to its price. It implies that a rise in price of a commodity brings about a fall in its purchase and vice-versa. This happens because of income and substitution effects.
Price of related commodities: Related commodities are of two types: (a) complementary goods and (b) Competing goods or substitutes. Complementary goods are those goods which are consumed together or simultaneously. For example, teas and sugar, automobiles and petrol, pen and ink are used together. When commodities are complements, a fall in the price of one will cause the demand of the other to rise. For example, a fall in the price of pens, will cause a rise in the demand for ink. The reverse will be the case when the price of a complement rises.
Competing goods or substitutes are those goods which can be used with ease in place of one another. For example, tea and coffee, ink pen and ball pen, are substitutes for each other and can be used in place of, one another easily. When goods are substitutes, a fall in the price of one leads to a fall in the quantity demanded of its substitutes. For example, if the price of tea falls, people will try to substitute it for coffee and demand more of it and less of coffee i.e. the demand for tea will rise and that of coffee fall.
Level of income of the household: Other things being equal, the demand for a commodity depends upon the income of the household. In most cases, the larger the average income of the household, the larger is the quantity demanded of a particular good. However, there are certain commodities for which quantities demanded decrease with an increase in income. These goods are called inferior goods. Even in the case of other goods, the response of quantiteis demanded to change in their prices is not of same proportions. If goods are such that they satisfy the basic necessities (food, clothing, shelter) of life, a change in their prices although will cause an increase in demand for these necessities this increase will be less than proportionate to the increases in income. This is because as people become richer, there is a relative decline in importance of food and other non-durable goods in the over all consumption pattern and a rise in importance of durable goods such as a AC, car, house etc.
Tastes and preference of consumers: The demand for a commodity also depends upon tastes and preferences of consumers and changes in them over a period of time. Goods which are more in fashion command higher demand than goods which are out of fashion. Consumers may even descard a good even before it is fully utilised and prefer another good which is in fashion. For example there is a greater demand for colour television and more and more people are discarding their black and white television even though they could have still used it for some more years.
Other factors: Apart from the above factors, the demand for a commodity demands upon the following factors:
Size of population: Generally, larger the size of population of a country of a region, greater is the demand for commodities in general.
Composition of population: If there are more old people in a region, the demond for spectacles, walking sticks, etc. will be high. Similarly, if the population consists of more of children, demand for toys, baby foods, toffees, will be more.
Distribution of income: The wealth of a country may be so distributed that there are a few exceptionally rich people while the majority are exceedingly poor. Under such conditions the propensity to consume of the country will be relatively less, for the propensity to consume of the rich people is less than that of the poor people. Consequently, the demand for consumer goods will be comparatively less. If the distribution of income is more equal, then the propensity to consume of the country as a whole will be relatively high indicating higher demand for goods.
Apart from above, factors such as class, group, education, marital status consumer’s expectations with regard to future price and weather conditions, also play an important role in influencing household demand.
Law of Demand
The law of demand is one of the most important laws of economic theroy. According to law of demand, other things being equal, if the price of a commodity falls, the quantity demanded of it will rise and if the price of a commodity rises, its quantity demanded will decline. Thus, there is an inverse relationship between price and quantity demanded, other things being same. The other things which are assumed to be equal or constant consumers, and such other factor which influence demand.
The law of demand may be illustrated with the help of a demand schedule and a demand curve.
When price of commodity X is Rs. 5 per unit, the demand is 10 units of the commodity. When the price falls to Rs. 4 demand rise to 15 units of the commodity Similarly, when the price further falls, goes on rising until at price Re. 1, the quantity demanded 60 units. The above table depicts an inverse relationship betwen price and quantity demanded as the price of the commodity X goes on rising, its demand goes on falling.
Demand curve
We can now plot the data from Table on a graph with price on the vertical axis and quantity on the horizontal axis. In fig. we have shown such a graph and plotted the five points corresponding to each price-quantity combination shown in Table. Point A, shows the same information as the first row of Table that at Rs. 5 per unit, only 10 units of X will be demanded. Point E shows the same information as does the last row of the table, when the price is Re. 1, the qunatity demanded will be 60 units.
We now draw a smooth curve through these points. The curve is called the demand curve for commodity ‘X’. The curve shows the quantity of ‘X’ that a consumer would like to buy at a each price; its downward slope indicates that the quantity of ‘X’ demanded increases as its price falls. Thus the downward sloping demand curve is in accordance with the law of demand which as stated above, describes an inverse price-demand relationship
Exceptions to the Law of Demand
According to the law of demand, more of a commodity will be demanded at lower prices than at higher prices, other things being equal. The law of demand is valid in most of the cases; however there are certain cases where this law does not hold good. The following are the important exceptions to the law of demand.
Conspicuous goods: Some consumers measure the utility of a commodity by its price i.e. if the commodity is expensive they think that it has got more utility. As such, they buy less of this commodity at low price and more of it at high price.
Such goods which exhibit direct price-demand relationship are called ‘Giffen goods’. Generally those goods which are considered inferior by the consumers and which occupy a substantial place in consumer’s budget are called ‘Giffen goods’. Examples of such goods are coarse grains like bajra, low quality of rice and wheat etc.
Conspicuous necessities: The demand for certain goods is affected by the demonstration effect of the consumption pattern of a social group to which an individual belongs. These goods, due to their constant usage, have become necessities of life. For example, in spite of the fact that the prices of television sets, refrigerators, coolers, cooking gas etc. have been continuously rising, their demand does not show any tendency to fall.
Future expectations about prices: It has been oberved that when the prices are rising, households expecting that the prices in the future will be still higher, tend to buy larger quantities of the commodities. For example, when there is wide-spread drought, people expect that prices of foodgrains would rise in future. They demand greater quantities of foodgrains as their price rise.
The law has been derived assuming consumers to be rational and knowledgeable about market-conditions. However, at times consumers tend to be irrational and make impulsive purchases without any cool calculations about price and usefulness of the product and in such contexts the law of demand falls.
Expansion and contraction in demand
The demand schedule, demand curve and the law of demand all show that when the price of a commodity falls its quantity demanded increases, other things being equal. When as a result of decrease in price, the quantity demanded increases, in Economics, we say that there is an expansion of demand and when as a result of increase in price, quantity demanded decreases we say that there is contraction of demand. For example, suppose the price of apples at at any time is Rs. 10 per kilogram and a consumer buys one kilogram at that price. Now, if other things such as income, prices of other goods and tastes of the consumers remain same but the price of apples falls to Rs. 8 per kilogram quantity demanded or there is an expansion of demand. On the contrary, if the price of apples rises to Rs. 15 per kilogram and consumer buys only half a kilogram, we say that there is contraction of demand.
