Demand for a good is defined as the quantity of the good purchased at a given price at given time. The definition of demand includes three components:
- Price of the commodity
- Quantity of the commodity bought
- Time period
Demand and Desire
Demand is desire backed by ability to purchase. This means that if somebody desires to have a good, he or she can demand it if he or she has the money to purchase it by paying its price. Anyone can desire any good or service. But just by desiring something, one cannot have it without paying the price. Once the price is paid by the person who has desired it, only then it becomes the demand for the good by that person.
Factors affecting Individual Demand
Individual demand refers to the quantity of a commodity that an individual buyer is willing to buy at given price per unit of time. But how much quantity of a commodity one is willing to buy depends upon the following factors. These are also called determinants of demand.
- Price of the commodity
- Price of related goods
- Income of the buyer
- Tastes and preferences of the buyer
1. Price of the commodity
When you visit a market to buy a commodity, you go to a seller of that commodity and ask for its price first. If you think that the price is reasonable, you buy the required quantity of the commodity. On the other hand, if the price is higher in your opinion, you may not buy or buy less quantity of it. Generally we are willing to buy more quantity of a commodity at a lower price and less of it at a higher price, if all other factors determining demand remain constant.
2. Price of related goods
The demand for a commodity is also influenced by the prices of its related goods. Related goods can be of two types: (a) substitute goods (b) complementary goods. Substitute goods are those goods which can easily be used in place of each other. Example of substitute goods are coke and pepsi, tea and coffee. If price of coffee increases, people will demand more of tea and thus demand for tea will increase. If price of coffee falls, people will demand more of coffee and thus demand for tea will fall. So, the demand for a commodity is directly related to the price of its substitute goods.
On the other hand, complementary goods are those goods which are used together in satisfying a particular want. Examples of complementary goods are car and petrol, ball pen and refill. If we have a car, we also require petrol to run it. If the price of one of them increases, the demand for other good will decrease and if price of one of them falls, the demand for the other will increase. So, the demand for a commodity is inversely related to the price of its complementary goods.
3. Income of the buyer
The demand for a commodity also depends on the income of the buyer. When your income increases, you are likely to spend more on purchase of some goods such as fruits, full cream milk, butter. Such goods are normal goods. Normal goods are those goods whose demand increases with the increase in income. So, the demand for normal goods is directly related to the income of the buyer.
But there are some goods whose demand decreases when income of the buyer increases, such as jowar, bajra, toned milk. These goods are called inferior goods. So, the demand for inferior goods is inversely related to the income of the buyer.
4. Tastes, preferences and fashion
Tastes, preference and fashion are important factors which affect the demand for a commodity. Demand for those goods increases which are preferred by the buyer or which are in fashion. On the other hand, demand for those goods decreases which are not preferred by the buyer or which are out of fashion.
Individual Demand Schedule
Every individual demands some goods and services for the satisfaction of his or her wants. Demand for a commodity by an individual buyer is called individual demand. Individual demand is the quantity of a commodity that an individual buyer is willing to buy at given price per unit of time.
Law of Demand
The law of demand gives the relationship between price of a commodity and its quantity demanded, when all factors other than price of the commodity remain unchanged.
The demand for commodity is affected by many factors such as price of the commodity, price of related goods, income of the buyer, tastes and preferences. So the law of demand gives effect of change in price of the commodity on the quantity demanded, assuming that all other factors such as, price of related goods, income of the buyer, tastes and preferences remain constant.
The law of demand is given as, "If price of a commodity falls, its quantity demanded increases and if price of the commodity rises, its quantity demanded falls, other things remaining constant." The law of demand means that, other factors determining the demand remaining constant, price of a commodity and its quantity demanded are inversely related.
Demand curve is a diagrammatic representation of law of demand. The demand curve shows different quantities of a commodity demanded at different prices in diagrammatic form.
According to the law of demand, when all other factors determining demand remain constant, the buyer buys more quantity of a commodity at lower price and less of it at a higher price. Due to this inverse relationship between price and quantity demanded, the demand curve slopes downwards from left to right. The most important reasons for the inverse relationship between price and quantity demanded are:
When more and more units of a commodity are consumed, satisfaction derived from successive units of the commodity goes on diminishing. For example, a hungry person gets maximum satisfaction from the first chapatti, lesser satisfaction from second chapatti and still lesser from third chapatti, and so on. If he gets more satisfaction, he will be ready to pay more and if he gets less satisfaction, he will be ready to pay less price for it. It means he will be willing to buy more quantity of a commodity at lower price and less of it at higher price. The law of demand also provides the same information which will lead to downward slope of demand curve.
Suppose, you buy mangoes from the market. If the price of mangoes is Rs 40 per kg and you buy 2 kgs of mangoes at this price. If the price of mangoes falls from Rs 40 per kg to Rs 20 per kg, your real income or purchasing power is doubled and you can now buy double quantity i.e. 4 kg of mangoes with the same money income. Thus a buyer can buy more quantity of a commodity when its price falls and less of it when its price rises leading to the downward slope of the demand curve.
When price of a commodity falls, it becomes relatively cheaper than its substitutes. For example, if the price of coke falls, it becomes comparatively cheaper than its substitute i.e. pepsi. People start buying coke in place of pepsi, leading to more demand for coke when its price falls. On the other hand, demand for the commodity will fall when its price rises. It will lead to downward slope of the demand curve.
The total quantity of a commodity demanded by all the individual buyers in the market at the given price at given time is called market demand of that commodity. Market demand is the total quantity of a commodity that all the individual buyers in the market are willing to buy at given prices per unit of time. In addition to the factors affecting individual demand for a commodity market demand is also influenced by the following factors:
Number of buyers: Number of buyers buying a commodity determine the demand for the commodity in the market. If the number of buyer of a commodity is large, market demand for the commodity will be more. On the other hand, if the number of buyers is small, market demand for the commodity will be less.
Distribution of income and wealth: The distribution of income and wealth in a society also determines the market demand of a commodity. If the distribution of income and wealth is more in favour of the rich, demand for the commodities preferred by the rich is likely to be higher. On the other hand, if the distribution of income and wealth is more in favour of poor, demand for the commodities preferred by the poor is likely to be higher.
Climatic condition: It is generally observed that the demand for ice increases during summer season. Similarly, demand for umbrella and rain coats increases during rainy season and demand for woollens increases during winter season. So the market demand for a commodity is also influenced by the climatic conditions.