Meanings
and Definition of Demand:
The
word 'demand' is so common and familiar with
every one of us that it seems superfluous to define it. The need for precise
definition arises simply because it is sometimes confused with other words such
as desire, wish, want, etc.
Demand
in economics means a desire to possess a good supported by willingness and
ability to pay for it. If your have a desire to buy a certain commodity, say a
car, but you do not have the adequate means to pay for it, it will simply be a
wish, a desire or a want and not demand. Demand is an effective desire, i.e., a
desire which is backed by willingness and ability to pay for a commodity in
order to obtain it. In the words of Prof. Hibdon:
"Demand
means the various quantities of goods that would be purchased per time period
at different prices in a given market".
Characteristics of Demand:
There
are thus three main characteristic's of
demand in economics.
(i)
Willingness and ability to pay. Demand is the amount of a commodity
for which a consumer has the willingness and also the ability to buy.
(ii)
Demand is always at a price. If we talk of demand without
reference to price, it will be meaningless. The consumer must know both the
price and the commodity. He will then be able to tell the quantity demanded by
him.
(iii)
Demand is always per unit of time. The time may be a day, a week, a
month, or a year.
Example:
For
instance, when the milk is selling at the rate of $15.0 per liter, the demand
of a buyer for milk is 10 liters a day. If we do not mention the period of
time, nobody can guess as to how much milk we consume? It is just possible we
may be consuming ten liters of milk a week, a month or a year.
Summing
up, we can say that by demand is meant
the amount of the commodity that buyers are able and willing to purchase at any
given price over some given period of time. Demand is also described as a
schedule of how much a good people will purchase at any price during a
specified period of time.
Law of
Demand:
Definition and Explanation of the
Law:
We
have stated earlier that demand for a commodity is related to price per unit of
time. It is the experience of every consumer that when the prices of the
commodities fall, they are tempted to purchase more. Commodities and when the
prices rise, the quantity demanded decreases. There is, thus, inverse
relationship between the price of the product and the quantity demanded. The
economists have named this inverse relationship between demand and price as the law of demand.
Statement of the Law:
Some
well known statements of the law of demand are as under:
According
to Prof.
Samuelson:
"The
law of demand states that people will buy more at lower prices and buy less at
higher prices, other things remaining the same".
E.
Miller writes:
"Other
things remaining the same, the quantity demanded of a commodity will be smaller
at higher market prices and larger at lower market prices".
"Other
things remaining the same, the quantity demanded increases with every
fall in the price and decreases with every rise in the price".
In
simple we can say that when the price of a commodity rises, people buy less of
that commodity and when the price falls, people buy more of it ceteris paribus
(other things remaining the same). Or we can say that the quantity varies
inversely with its price. There is no doubt that demand responds to price in
the reverse direction but it has got no uniform relation between them. If the
price of a commodity falls by 1%, it is not necessary that may also increase by
1%. The demand can increase by 1%, 2%, 10%, 15%, as the situation
demands. The functional relationship between demanded and the price of the
commodity can be expressed in simple mathematical language as under:
Formula For Law of Demand:
Qdx = f (Px, M, Po, T,..........)
Here:
Qdx = A quantity demanded of commodity x.
f =
A function of independent variables contained within the parenthesis.
Px = Price of commodity x.
Po = Price of the other commodities.
T =
Taste of the household.
The
bar on the top of M, Po, and T means that they are kept constant.
The demand function can also be symbolized as under:
Qdx = f (Px) ceteris paribus
Ceteris
Paribus. In economics, the term is used
as a shorthand for indicating the effect of one economic variable on another,
holding constant all other variables that may affect the second variable.
Schedule of Law of Demand:
The
demand schedule of an individual for a commodity is a Iist or table of the
different amounts of the commodity that are purchased the market at different
prices per unit of time. An individual demand schedule for a good say shirts is
presented in the table below:
Individual Demand Schedule for
Shirts:
(In Dollars)
|
Price per
shirt
|
100
|
80
|
60
|
40
|
20
|
10
|
|
Quantity
demanded per year Qdx
|
5
|
7
|
10
|
15
|
20
|
30
|
According
to this demand schedule, an individual buys 5 shirts at $100 per shirt and 30
shirts at $10 per shirt in a year.
Law of Demand Curve/Diagram:
Demand
curve is a graphic representation of the demand schedule.
According to Lipsey:
"This
curve, which shows the relation between the price of a commodity and the amount
of that commodity the consumer wishes to purchase is called demand curve".
It is a
graphical representation of the demand schedule.
In
the figure (4.1), the quantity. demanded of shirts in plotted on horizontal
axis OX and "price is measured on vertical axis OY. Each price- quantity
combination is plotted as a point on this graph. If we join the price quantity
points a, b, c, d, e and f, we get the individual demand curve for shirts. The
DD/ demand curve slopes downward from
left to right. It has a negative slope showing that the two variables price and
quantity work in opposite direction. When the price of a good rises, the
quantity demanded decreases and when its price decreases, quantity demanded
increases, ceteris paribus.
Assumptions of Law of Demand:
According
to Prof.
Stigler and Boulding:
There
are three main assumptions of the Law:
(i)
There should not be any change in the tastes of the consumers for goods (T).
(ii)
The purchasing power of the typical consumer must remain constant (M).
(iii)
The price of all other commodities should not vary (Po).
Example of Law of Demand:
If
there is a change, in the above and other assumptions, the law may not hold
true. For example, according to the law of demand, other things being equal
quantity demanded increases with a fall in price and diminishes with rise to
price. Now let us suppose that price of tea comes down from $40 per pound to
$20 per pound. The demand for tea may not increase, because there has taken
place a change in the taste of consumers or the price of coffee has fallen down
as compared to tea or the purchasing power of the consumers has decreased,
etc., etc. From this we find that demand responds to price inversely only, if
other thing remains constant. Otherwise, the chances are that, the quantity
demanded may not increase with a fall in price or vice-versa.
Demand,
thus, is a negative relationship between price and quantity.
In
the words of Bilas:
"Other
things being equal, the quantity demanded per unit of time will be greater, lower
the price, and smaller, higher the price".
Limitations/Exceptions of Law of
Demand:
Though
as a rule when the prices of normal goods rise, the demand them decreases but
there may be a few cases where the law may not operate.
(i)
Prestige goods: There are certain commodities like
diamond, sports cars etc., which are purchased as a mark of distinction in
society. If the price of these goods rise, the demand for them may increase
instead of falling.
(ii)
Price expectations: If people expect a further rise in
the price particular commodity, they may buy more in spite of rise in price.
The violation of the law in this case is only temporary.
(3)
Ignorance of the consumer: If the consumer is ignorant about
the rise in price of goods, he may buy more at a higher price.
(iv)
Giffen goods: If the prices of basic goods,
(potatoes, sugar, etc) on which the poor spend a large part of their incomes
declines, the poor increase the demand for superior goods, hence when the price
of Giffen good falls, its demand also falls. There is a positive price effect
in case of Giffen goods.
Importance of Law of Demand:
(i)
Determination of price. The study of law of demand is
helpful for a trader to fix the price of a commodity. He knows how much demand
will fall by increase in price to a particular level and how much it will rise
by decrease in price of the commodity. The schedule of market demand can
provide the information about total market demand at different prices. It helps
the management in deciding whether how much increase or decrease in the price
of commodity is desirable.
(ii) Importance to Finance Minister. The study of this law is of great advantage to the finance minister. If by raising the tax the price increases to such an extend than the demand is reduced considerably. And then it is of no use to raise the tax, because revenue will almost remain the same. The tax will be levied at a higher rate only on those goods whose demand is not likely to fall substantially with the increase in price.
(iii)
Importance to the Farmers. Goods or bad crop affects the
economic condition of the farmers. If a goods crop fails to increase the
demand, the price of the crop will fall heavily. The farmer will have no
advantage of the good crop and vice-versa.
Summing
up we can say that the limitations or
exceptions of the law of demand stated above do not falsify the general law. It
must operate.
Individual's
and Market Demand for a Commodity:
Individual's Demand for a
Commodity:
Definition and Explanation:
"The
individuals demand for a commodity is the amount of a commodity which
the consumer is willing to purchase at any given price over a specified period
of time".
The
individual's demand for a commodity varies inversely price ceteris paribus. As
the price of a goods rises, other things remaining the same, the quantity
demanded decreases and as the price falls, the quantity demanded increases.
Price
(p) is here an independent variable ad quantity (q) dependent variable.
Individual's Demand Schedule:
The
demand schedule of an individual for a commodity is a list or table of the
different amounts of the commodity that are purchased the market at different
prices per unit of time. An individual demand schedule for a good say shirts is
presented in the table below:
Individual Demand Schedule for
Shirts:
|
Price Per
Shirt ($)
|
100
|
80
|
60
|
40
|
20
|
10
|
|
Quantity
Demanded Per Year Qdx
|
5
|
7
|
10
|
15
|
20
|
30
|
According to this demand schedule, an individual buys 5 shirts at $100 per shirt and 30 shirts at $10 per shirt in a year.
Individual's Demand Curve:
Demand
curve is a graphic representation of the demand schedule.
According to Lipsey:
"The
curve, which shows the relation between the price of a commodity and the amount
of that commodity the consumer wishes to purchase is called demand curve".
The
DD/ demand curve slopes downward from
left to right. It has a negative slope showing that the two variables price and
quantity work in opposite direction. When the price of a good rises, the
quantity demanded decreases and when its price decreases, quantity .demanded
increases, ceteris paribus.
Market Demand for a Commodity:
Definition and Explanation:
The
market demand for a commodity is obtained by adding up the total quantity
demanded at various prices by all the individuate over a specified period of
time in the market It is described as the horizontal summation of the
individuals demand for a commodity at various possible prices in market.
In
a market, there are a number of buyers for a commodity at each price. In order
to avoid a lengthy addition process, we assume here that there are only four
buyers for a commodity who purchase different amounts of the commodity at each
price.
Market Demand Schedule:
The
horizontal summation of individuals demand for a commodity will be the market
demand for a commodity as is illustrated in the following schedule:
A market Demand Schedule in a Four
Consumer Market:
|
Price ($)
|
Quantity Demanded
|
Quantity Demanded
|
Quantity Demanded
|
Quantity Demanded
|
Total Quantity Demanded Per Week (in
thousands)
|
|
First Buyer
|
Second Buyer
|
Third Buyer
|
Fourth Buyer
|
||
|
10
8
6
4
2
|
10
15
25
40
60
|
13
20
30
35
50
|
6
9
10
15
30
|
11
16
20
30
40
|
40
60
85
120
180
|
In
the above schedule, the amount of commodity demanded by four buyers (which we
assume constitute the entire market) differs for each price When the price of a
commodity is $10, the total quantity demanded is 4C thousand units per week. At
price of $2, the total quantity demanded increases to 180. thousand units.
.
Market Demand Curve:
Market
demand curve for a Commodity is the horizontal sum of individual demand curves
of ail the buyers in a market. This is illustrated with the help of the market
demand schedule given above.
The
market demand curve DD/ for a commodity, like the
individual demand curve is negatively sloped, (see figure 4.2). It shows that
under the assumptions (ceteris paribus) other things remaining the same, there
is an inverse relationship between the quantity demanded and its price.
At
price of $10, the quantity demanded in the market is 40 thousand units. At
price of $2.0. it increases to 180 thousand units. In. other words, the lower
the price of the good X, the greater is the demand for it ceteris paribus.
Movement
Vs Shifts of Demand Curve:
Changes
in demand for a commodity can be shown through the demand curve in two ways:
(1)
Movement Along the Demand Curve and (2) Shifts of the Demand Curve.
(1) Movement Along the Demand
Curve:
Demand
is a multivariable function. If income and other determinants of demand such as
tastes of the consumers, changes in prices of related goods, income
distribution, etc., remain constant and there is a change only in price of the
commodity, then we move along the same demand curve.
In
this case, the demand curve remains unchanged. When, as a result of change in
price, the quantity demanded increases or decreases, it is technically called extension and contraction in
demand.
The demand curve, which
represents various price quantity has a negative slope. Whenever there is
a change in the quantity demanded of a good due to change, in its price, there
is a movement from one point price quantity combination to another on the
same demand curve. Such a
movement from one point price quantity combination to another along the same
demand curve is shown in figure (4.3).
Here
the price of a commodity falls from $8 to $2. As a result, therefore, the
quantity demanded increases from 100 units to 400 units per unit of time. There
is extension in demand by 300 units. This movement is from one point price
quantity combination (a) to another point (b) along a given demand curve. On
the other hand, if the price of a good rises from $2 to $8, there is
contraction in demand by 300 units.
We,
thus, see that as a result of change in the price of a good, the consumer moves
along the given demand curve. The demand curve remains the same and does not
change its position. The movement along the demand curve is designated as change
in quantity demanded.
(2) Shifts in Demand Curve:
Demand,
as we know, is determined by many factors. When there is a change in demand due
to one or more than one factors other than price, results in the shift of
demand curve.
For
example, if the level of income in community rises, other factors remaining the
same, the demand for the goods increases. Consumers demand more goods at each
price per period of me (rise or Increase in demand). The demand curve shifts
upward from he original demand curve indicating that consumers at each price
purchase more units of commodity per unit of time.
If
there is a fall in the disposable income of the consumers or rise in the prices
of close substitute of a good or decline in consumer taste or non-availability
of good on credit, etc, etc., there is a reduction in demand (fall or decrease
in demand). The fall or decrease in demand shifts the demand curve from the
original demand curve to the left. The lower demand curve shows that consumers
are able and willing to buy less of the good at each price than before.
Schedule:
|
Pdx ($)
|
Qdx
|
Rise in Qdx
|
Fall in Qdx
|
|
12
|
100
|
300
|
50
|
|
6
|
250
|
500
|
200
|
|
4
|
500
|
600
|
300
|
At
a price of $12 per unit, consumers purchase 100 units. When price
falls to$4 per unit, the quantity demanded increases to 500 units per unit of
time. Let us assume now that level of income increases in a community.
Now consumers demand 300 units of the commodity at price of $12 per unit
and 600 at price of $4 per unit.
As
a result, there is an upward shift of the demand curve DD2. In case
the community income falls, there is then decrease in demand at price of $12
per unit. The quantity demanded of a good falls to 50 units. It is 300 units at
price of $4 unit per period of time. There is a downward shift of the demand to
the left of the original demand curve.
Summing
Up:
(i)
Extension in demand is due to reduction in price.
(ii)
Increase in demand occurs due to changes in factors other than price.
(iii)
Contraction in demand is the result of a rise in the price commodity.
(iv)
A decrease in demand follows a change in factors other than price.
(v)
Changes in demand both increase and decrease are represent shifts in the demand
curve.
(vi)
Changes in the quantity demanded are represented by move along the same demand
curve.
Non Price Factors or Shifts Factors Causing Changes in Demand:
Determinants of Demand:
While explaining the law of demand, we have stated that, other things remaining the same (cetris
paribus), the demand for a commodity inversely with price per unit of time. The
other things, have an important bearing on the demand for a commodity.
They bring about changes in demand independently of changes in
price. These non-price
factors shift factors or determinants which
influence demand are as follow:
(i) Changes in population: If the population of a country increase account of immigration or
through high birth rate or on account of these factors, the demand for various
kinds of goods will increase even the prices remains the same. The demand curve
will shift upward to the right.
The nature of the commodities .demanded will depend up to taste of
the consumers. If due to high net production rate, the percentage of children
to the total population increases in a country, there will greater demand for
toys, children food, etc. Similarly, if the percent aged people to the total
population increases, the demand for walking sticks, artificial teeth, invalid
chairs, etc, will increase.
(ii) Changes in tastes: Demand for a commodity may change due to changes in tastes and
fashions. For example, people develop a taste for coffee. There is then a
decrease in the demand for tea. The de curve for tea shifts to the left of the
original demand curve.
Similarly women's fashions are usually ever changing. Sometime
they keep hair and sometime short. So, whenever there is a change in their hair
style, the demand for hairpins, hair nets, etc. is greatly affected.
(iii) Changes in income: When the income of consumers increases generally leads to an
increase in the demand for some commodities and a decrease in the demand for
other commodities. For example, when income of people increases, they begin to
spend money on those which were previously regarded by them as luxuries, or
semi-luxuries and reduce the expenditure on inferior goods.
Take the case of a man whose income has increased from $1000 to
$20,000 per month. His consumption of wheat will go down because he now spends
more money on the superior food such as cake, fish, daily products, fruits,
etc., etc.
(iv) Changes in the distributions of wealth: If an equal distribution of wealth is brought about in a country,
then there will be less demand for expensive luxuries goods. There will be more
demand for necessaries and comfort items.
(v) Changes in the price of substitutes: if the price of a particular commodity rises, people may stop
further purchase of that commodity and spend money on its substitute which is
available at a lower price. Thus we find, a change in demand can also be
brought about by a change in the price of the substitute.
(vi) Changes in the state of trade: The total quantity of goods demanded is also affected by the
cyclical fluctuations in economic activities. If the trade is prosperous, the
demand for raw material, machinery, etc., increases. If on the other hand, the
trade period is dull, the demand for, producer's goods will fail sharply as
compared to the demand for consumer goods.
(vii) Climate and weather conditions: The climate and weather conditions have an important bearing on
the demand of a commodity. For instance, the consumer's demand for woolen
clothes increases in winter and decreases in summer.
Slope of the Demand Curve:
Demand Curve is negatively Sloped:
The demand curve generally slopes downward from left to right. It
has a negative slope because the two important variables price and quantity
work in opposite direction. As the price of a commodity decreases, the quantity
demanded increases over a specified period of time, and vice versa, other ,
things remaining constant.
The fundamental reasons for demand curve to slope downward are as
follows:
(i) Law of diminishing marginal utility: The law of demand is based on the law of diminishing marginal
utility. According to the cardinal utility
approach, when a consumer purchases more units of a commodity, its marginal
utility declines. The consumer, therefore, will purchase more units of that
commodity only if its price falls. Thus a decrease in price brings about an
increase, in demand. The demand curve, therefore, is downward sloping.
(ii) Income effect: Other things being equal, when the price of a commodity decreases,
the real income or the purchasing power of the household increases. The
consumer is now in a position to purchase more commodities with the same
income. The demand for a commodity thus increases not only from the existing
buyers but also from the new buyers who were earlier unable to purchase at
higher price. When at a lower price, there is a greater demand for a commodity
by the households, the
demand curve is bound to slope downward from left to right.
(iii) Substitution effect: The demand curve slopes downward from left to right also because
of the substitution effect. For instance, the price of meat falls and the
prices of other substitutes say poultry and beef remain constant. Then the
households would prefer to purchase meat because it is now relatively cheaper.
The increase in demand with a fall in the price of meat will move the demand
curve downward from left to right.
(iv) Entry of new buyers: When the price of a commodity falls, its demand not only increases
from the old buyers but the new buyers also enter the market. The combined
result of the income and substitution effect is that demand extends, ceteris
paribus, as the .price falls. The demand curve slopes downward from left to
right.
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