Thursday, February 20, 2014

DEMAND CONCEPTS

Meaning of Demand

Demand is a common parlance means desire for an object. But in economics demand is something more than this. In economics „Demand‟ means the quantity of goods and services which a person can purchase with a requisite amount of money.

According to Prof.Hidbon, “Demand means the various quantities of goods that would be purchased per time period at different prices in a given market. Thus demand for a commodity is its quantity which consumer is able and willing to buy at various prices during a given period of time. Simply, demand is the behavior of potential buyers in a market.

In the opinion of Stonier and Hague, “Demand in economics means demand backed up by enough money to pay for the goods demanded”. In other words, demand means the desire backed by the willingness to buy a commodity and purchasing power to pay. Hence desire alone is not enough. There must have necessary purchasing power, ie, .cash to purchase it. For example, everyone desires to posses Benz car but only few have the ability to buy it. So everybody cannot be said to have a demand for the car. Thus the demand has three essentials-Desire, Purchasing power and Willingness to purchase.

Demand Analysis

Demand analysis means an attempt to determine the factors affecting the demand of a commodity or service and to measure such factors and their influences. The demand analysis includes the study of law of demand, demand schedule, demand curve and demand forecasting. Main objectives of demand analysis are;

1)      To determine the factors affecting the demand.
2)      To measure the elasticity of demand.
3)      To forecast the demand.
4)      To increase the demand.
5)      To allocate the recourses efficiently

Law of Demand

The law of Demand is known as the „first law in market”. Law of demand shows the relation between price and quantity demanded of a commodity in the market. In the words of Marshall “the amount demanded increases with a fall in price and diminishes with a rise in price”.

According to Samuelson, “Law of Demand states that people will buy more at lower price and buy less at higher prices”. In other words while other things remaining the same an increase in the price of a commodity will decreases the quantity demanded of that commodity and decrease in the price will increase the demand of that commodity. So the relationship described by the law of demand is an inverse or negative relationship because the variables (price and demand) move in opposite direction. It shows the cause and effect relationship between price and quantity demand.

The concept of law of demand may be explained with the help of a demand schedules.


Individual demand Schedule

An individual demand schedule is a list of quantities of a commodity purchased by an individual consumer at different prices. The following table shows the demand schedule of an individual consumer for apple.

Price of Apple
Quantity
(In Rs.)
demanded
10
1
8
2
6
3
4
4
2
5



When the price falls from Rs 10 to 8, the quantity demanded increases from one to two. In the same way as price falls, quantity demanded increases. On the basis of the above demand schedule we can draw the demand curve as follows;




The demand curve DD shows the inverse relation between price and demand of apple. Due to this inverse relationship, demand curve is slopes downward from left to right. This kind of slope is also called “negative slope”

Market demand schedule

Market demand refers to the total demand for a commodity by all the consumers. It is the aggregate quantity demanded for a commodity by all the consumers in a market. It can be expressed in the following schedule.

Market Demand Schedule for egg.

Price  per

Demand by consumers

Market


dozen(Rs)
A
B
C
D
Demand


10
1
2
0
0
3


8
2
3
1
0
6


6
3
4
2
1
10


4
4
5
3
2
14


2
5
6
4
3
18


Derivation of market demand curve is a simple process. For example, let us assume that there are four consumers in a market demanding eggs. When the price of one dozen eggs is Rs.10, A buys one dozen and B buys 2 dozens. When price falls to Rs.8, A buys 2 , B buys 3 and C buys one dozen. When price falls to Rs.6, A buys 3 b buys 4,C buys 2 and D buys one dozen and so on. By adding up the quantity demanded by all the four consumers at various prices we get the market demand curve. So last column of the above demand schedule gives the total demand for eggs at different prices,ie,”Market Demand” as given below;





   Assumptions of Law of Demand

   Law of demand is based on certain basic assumptions. They are as follows

1)      There is no change in consumers‟ taste and preference
2)      Income should remain constant.
3)      Prices of other goods should not change.
4)      There should be no substitute for the commodity.
5)      The commodity should not confer any distinction.
6)      The demand for the commodity should be continuous.
7)      People should not expect any change in the price of the commodity.

Determinants of Demand
Demand of a commodity may change. It may increase or decrease due to changes in certain factors. These factors are called determinants of demand. These factors include;

1)      Price of a commodity
2)      Nature of commodity
3)      Income and wealth of consumer
4)      Taste and preferences of consumer
5)      Price of related goods (substitutes and compliment goods)
6)      Consumers‟ expectations.
7)      Advertisement etc...


Different types of demand.

Joint demand:

When two or more commodities are jointly demanded at the same time to satisfy a particular want, it is called joint or complimentary demand.(demand for milk, sugar, tea for making tea).

Composite demand:
The demand for a commodity which can be put for several uses (demand for electricity)

Direct and Derived demand:

Demand for a commodity which is for a direct consumption is called direct demand.(food, cloth). When the commodity is demanded as s result of the demand of another commodity, it is called derived demand.(demand for tyres depends on demand of vehicles).

Industry demand and company demand:

Demand for the product of particular company is company demand and total demand for the products of particular industry which includes number of companies is called industry demand.
Exceptions to the Law of Demand. (Exceptional Demand Curve).

The basic feature of demand curve is negative sloping. But there are some exceptions to this. I.e... In certain circumstances demand curve may slope upward from left to right (positive slopes). These phenomena may due to;

1)  Giffen paradox

The Giffen goods are inferior goods is an exception to the law of demand. When the price of inferior good falls, the poor will buy less and vice versa. When the price of maize falls, the poor will not buy it more but they are willing to spend more on superior goods than on maize. Thus fall in price will result into reduction in quantity. This paradox is first explained by Sir Robert Giffen.

2)  Veblen or Demonstration effect.

According to Veblen, rich people buy certain goods because of its social distinction or prestige. Diamonds and other luxurious article are purchased by rich people due to its high prestige value. Hence higher the price of these articles, higher will be the demand.

3)  Ignorance.

Some times consumers think that the product is superior or quality is high if the price of that product is high. As such they buy more at high price.

4)  Speculative Effect.

When the price of commodity is increasing, then the consumer buy more of it because of the fear that it will increase still further.
5)  Fear of Shortage.

During the time of emergency or war, people may expect shortage of commodity and buy more at higher price to keep stock for future.

6)  Necessaries

In the case of necessaries like rice, vegetables etc., People buy more even at a higher price.

7)  Brand Loyalty

When consumer is brand loyal to particular product or psychological attachment to particular product, they will continue to buy such products even at a higher price.

8) Festival, Marriage etc.
In certain occasions like festivals, marriage etc. people will buy more even at high price.