3. What is Demand?
Demand is an economic concept that relates to a consumer's desire to
purchase goods and services and willingness to pay a specific price for them.
An effective demand has three characteristics namely, desire, willingness,
and ability of an individual to pay for a product.
Demand is relative concept
Demand means a desire backed up by willingness to pay & the capacity to
pay. Demand for a commodity cannot be shown absolutely. It is always
shown with the Time factor & Price factor.
4. Let us take an example…
It will be clear from the following three sentences.
1. Demand for milk is 10 liters.
2. Demand for milk is 10 liters per day.
3. Demand for milk is 10 liters per day at a price of Rs. 15/- per liter.
Out of these 3 sentences, the first 2 sentences are meaningless. In the first
sentence only the quantity demanded is given without the Time & Price factor.
In the 2nd sentence the quantity demanded is given with time factor only. In the
3rd sentence quantity demanded (10 liters) is given with the time factor (per
day) & price factor (Rs. 15 per liters)
So, we can conclude that demand means……….
”Quantity demanded by a consumer at a given time at a given price.”
In economics, a demand schedule is a table that shows the quantity demanded of
a good or service at different price levels. A demand schedule can be graphed as a
continuous demand curve on a chart where the Y-axis represents price, and the
X-axis represents quantity.
6. Types of Demand
Demand is generally classified on the basis of various factors, such as
nature of a product, usage of a product, number of consumers of a product,
and suppliers of a product.
The different types of demand are as follows:
I. Individual and Market Demand: It refers to the classification of
demand of a product based on the number of consumers in the market.
Individual demand can be defined as a quantity demanded by an individual
for a product at a particular price and within the specific period of time.
Market demand is the aggregate of individual demands of all the
consumers of a product over a period of time at a specific price, while other
factors are constant.
7. Individual Demand Market Demand
It refers to the quantity
demanded of a commodity by a
single firm or consumer.
It refers to the quantity
demanded of a commodity by all
the consumers or the firms in
Individual demand is a
component of Market demand.
It is the aggregation of individual
The individual demand curve is
The market demand curve is
It has a narrower scope as it is
related to the tastes and
preferences of a consumer only.
It has a broader scope as it is
related to the tastes and
preferences of all the consumers.
It represents different quantities
of a commodity preferred by an
individual at different prices in
It represents different quantities
of a commodity preferred by all
consumers at different prices in
8. II. Organization and Industry Demand: This refers to the classification of
demand on the basis of market.
The demand for the products of an organization at given price over a point
of time is known as organization demand.
The sum total of demand for products of all organizations in a particular
industry is known as industry demand.
III. Autonomous and Derived Demand: This refers to the classification of
demand on the basis of dependency on other products.
The demand for a product that is not associated with the demand of other
products is known as autonomous or direct demand. The autonomous
demand arises due to the natural desire of an individual to consume the
On the other hand, derived demand refers to the demand for a product
that arises due to the demand for other products. Moreover, the demand
for substitutes and complementary goods is also derived demand.
9. IV. Demand for Perishable and Durable Goods: This refers to the
classification of demand on the basis of usage of goods. The goods are
divided into two categories, perishable goods and durable goods.
Perishable or non-durable goods refer to the goods that have a single use.
On the other hand, durable goods refer to goods that can be used
V. Short-term and Long-term Demand: This refers to the classification
of demand on the basis of time period.
Short-term demand refers to the demand for products that are used for a
shorter duration of time or for a current period. This demand depends on
the current tastes and preferences of consumers.
On the other hand, long-term demand refers to the demand for products
over a longer period of time. Generally, durable goods have long-term
10. Determinants of Demand
Price of a Product
The price of a product or service is generally inversely proportional to the quantity
demanded while other factors are constant. As per the law of demand, it implies that
when the price of the commodity or service rises, its demand falls and vice versa.
Price of related goods
Two items are said to be related to each other if the change in price of one item
affects the demand for the other item. Related goods can be categorized as follows:
i. Substitute or competitive goods: These goods can be used interchangeably as they
serve the same purpose; thus, are the competitors of each other.
For example, tea and coffee, cold drinks and juice, etc. The demand for a good or
service is directly proportional to the price of its substitute.
ii. Complementary goods: Complementary goods are used jointly; for example, car and
petrol. For example, an increase in the price of mobile phones not only would lead to a
fall in the quantity demanded but also lower the demand for mobile cover or scratch
11. Consumer income level
The level of income of individuals determines their purchasing power. Income
and demand are directly proportional to each other. This implies that a rise
in the consumer's’ income results in a rise in the demand for a commodity.
The demand for products changes with changes in the tastes and
preferences of consumers (which depend on customers’ customs,
traditions, beliefs, habits, and lifestyles).
For example, the demand for burqas is high in gulf countries. In such
countries, there may be less or no demand for short skirts.
12. Consumer expectation
Demand for commodities also depends on the consumers’ expectations
regarding the future price of a commodity, availability of the commodity,
changes in income, etc. Such expectations usually cause a rise in demand for
For example, if a consumer expects a rise in the price of a commodity in the
future, he/she may purchase larger quantities of the commodity in order to
stock it. Similarly, if a consumer expects a rise in his/her income, he/she
may purchase a commodity that was relatively unaffordable earlier.
Consumer credit facility
It refers to terms and conditions for supplying various commodities on
credit. Favorable credit facilities generally increase the demand for
expensive durable goods such as cars and houses.
For example, easy home and car loans offered by banks have led to a steep
rise in the demand for homes and cars respectively.
13. Size and growth of population
Population size refers to the actual number of individuals in a population. A
growth in the size of a population increases the demand for commodities as
the number of consumers would increase.
For example, a population with more youngsters will have higher demand
for commodities like t-shirts, jeans, guitars, bikes, etc. compared to the
population with more elderly people.
of national income
Distribution pattern of national income shows how the national income is
divided among groups of individuals, households, social classes, or factors of
For example, nations having evenly distributed income would have higher
demand for essential goods.
14. Climatic and weather conditions
The demand for commodities depends on the climatic and weather
conditions of a region such as cold, hot, humid, and dry.
For example, the demand for air coolers and air conditioners is higher during
summer while the demand for umbrellas tends to rise during monsoon.
This includes the actions taken by the government to determine the fiscal
policy and monetary policy such as taxation levels, budgets, money supply,
and interest rates. Government policies have a direct impact on the
demand for various commodities.
For example, if the government imposes high taxes (sales tax, VAT, etc.) on
commodities, their prices would increase, which would lead to a fall in their
15. Demonstration effect or,
The demand of certain goods is determined by the bandwagon effect or
demonstration effect. It means a buyer wants to have a product because
others have it. It means that an individual consumer's demand is
conditioned by the consumption of others.
Advertisement of a product
Product advertising attempts to create a demand for a product. This
includes promoting consumer awareness that a specific product exists and
fostering their interest in the product. Product advertising also strives to
encourage consumers to make purchase decisions quickly based on seeing
16. Change of Demand
● A change in demand describes a shift in consumer desire to purchase a
particular good or service, irrespective of a variation in its price. The change
could be triggered by a shift in income levels, consumer tastes, or a different
price being charged for a related product.
● A change in demand represents a shift in consumer desire to purchase a
particular good or service, irrespective of a variation in its price.
● The change could be triggered by a shift in income levels, consumer tastes,
or a different price being charged for a related product.
● An increase and decrease in total market demand is represented graphically
in the demand curve.
● Income: How much consumers have to spend.
● Consumer preferences: What types of products are popular at any given
● Buyer expectations: Does the consumer expect the price to rise in the future,
perhaps due to limited supply?
● Price: How much does the good or service cost?
● Prices of related items: Are there any substitute goods or services of similar
value that cost a lot less?
Factors that affect market demand
17. An increase and decrease in total market demand is illustrated in the
demand curve, a graphical representation of the relationship between
the price of a good or service and the quantity demanded for a given
period of time. Typically, the price will appear on the left vertical y-axis,
while the quantity demanded is shown on the horizontal x-axis.
The supply and demand curves form an X on the graph, with
supply pointing upward and demand pointing downward. Drawing
straight lines from the intersection of these two curves to the x- and
y-axes yields price and quantity levels based on current supply and
Consequently, a positive change in demand amid constant supply
shifts the demand curve to the right, the result being an increase in
price and quantity. Alternatively, a negative change in demand shifts
the curve left, leading price and quantity to both fall.
Recording Change in Demand
18. Example of Change of Demand
When an item becomes fashionable, perhaps due to smart advertising, consumers
clamor to buy it. For instance, Apple Inc.'s iPhone sales have remained fairly constant,
despite undergoing various price increases over the years, as many consumers view
it as the number one smartphone in the market and are locked into Apple’s
ecosystem. In various parts of the world, the Apple iPhone has also become a status
symbol, illustrating inelastic demand just as Nokia Corp.'s cellphones did in the early
Technological advancements and fashion trends aren't the only factors that can
trigger a change in demand. For example, during the mad cow disease scare,
consumers started buying chicken rather than beef, even though the latter's price
had not changed.
Chicken could also find itself in favor if the price of another competing poultry
products rises significantly. In such a scenario, demand for chicken rockets, despite
still costing the same at the supermarket. Alternatively, if there is a perceived
increase in the price of gasoline, then there could feasibly be a decrease in the
demand for gas-guzzling SUVs, ceteris paribus.
19. Law of Demand
Statement of law
“Other things being equal, the higher the price of a commodity, smaller is the
quantity demanded and lower the price, larger the quantity demanded”.
The law of demand explains that when other factors remain constant, the
quantity demand and price of any product or service show an inverse equation.
It also means that whenever the value of a specific product increases, demand
for the same declines; the exact opposite can also be observed
20. Substitution effect: When prices decrease for a related or comparable product,
consumers may find that product more desirable which can increase its demand.
Example: The cost of coffee increases but the cost of tea remains the same. Due to the
rising cost of coffee, consumers may decide to switch to tea to save money, an action
that increases the demand for tea.
Income effect: When incomes rise, people are typically willing to spend more and
so, the demand for economic goods may increase. Income increases mean the consumer
has more buying power and might purchase more of a product because they will spend
the same amount of money but receive more in return.
Varied Use: When goods are used for various purposes, demand may increase or
decrease and may depend on how the consumer uses the product. When prices go up,
consumers may find alternatives such as cooking dinner at home instead of eating out.
Example: If the cost of a gallon of gas goes up, demand goes down and consumers
respond by choosing to limit travel or seeking alternate transportation. Since customers
can find other ways to have their needs met, the purchase of gasoline is relegated to a
lesser need and demand decreases. However, if the cost of gasoline goes down, consumers
may drive more often and purchase more gas to increase demand.
Factors behind Law of demand
21. Exceptions to Law of demand
Expectations regarding future prices: The issue of price change in the market
is another exception to the law of Demand. There might be a situation when the
Price of a product or service increases and is subjected to future growth. So, the
customers may buy more of it to avoid further cost increment. Eventually, there are
times when the Price of a product is about to decrease. Consumers may temporarily
stop the purchase to avail of the future benefits of price decrement
Example: Recently, there has been a massive rise in the price of onions. People were
buying it more due to the worry of the further cost increase.
Giffen Goods :- These goods are goods that are inferior in comparison to
luxury goods. However, the unique characteristic of Giffen goods is that as its price
increases, the demand also increases. And this feature is what makes it an
exception to the law of demand.
Articles of snob appeal / Veblen effect :- According to Veblen, there are certain
goods that become more valuable as their price increases. If a product is expensive,
then its value and utility are perceived to be more, and hence the demand for that
Example: this happens mostly with precious metals and stones such as gold and
diamonds and luxury cars such as Rolls-Royce. As the price of these goods increases,
their demand also increases because these products then become a status symbol.