Economics

Demand – Meaning, Function, Determinants And Types

Demand refers to the quantities of a commodity that the consumers are able and willing to buy at each possible price during a given period of time other things being equal.

Function And Determinants Of Demand

(1) Price of the Commodity – The price of a commodity plays a major role in determining the demand for it. If there is no change in the other factors i.e. ceteris paribus (other things being equal), an inverse relationship is observed between the price of a commodity or service and its price. It is also called the ‘Law of Demand’. According to it, an increase in the price leads to a decrease in quantity demanded and vice-versa.

(2) Price of Related Commodities : The demand for a commodity is also affected by the price of related commodities. As the related commodities may be either complementary or substitute, so, the effects of changes in their demand have to be studied separately in the following manner

  • Price of Complementary Commodities: The change in the price of a complementary commodity makes the demand for other commodities to change in the opposite direction. For example, relationship between the price of car and demand for petrol. As both of these goods are complementary to each-other, so the rise in the price of car, leads to a fall in the demand of petrol.
  • Price of Substitution Commodities: Substitution commodities are those which are used in place of each-other. In case of such commodities, increase in the price of one commodity results into an increase in the demand of its substitute whereas a decrease in the price of the commodity leads to a decrease in the demand of its substitute. For example, Tea and Coffee are substitutes to each-other. If the price of tea rises, then consumer uses its substitute, which is none other than coffee. Consequently, the demand of coffee rises.

(3) Income of the Consumer (Y): Income o fthe consumer is also an important determinant of the demand for a commodity. Other things assumed to be constant, there is a direct relationship between the income of a consumer and the quantity of a commodity demanded by him.

(4) Tastes of Consumers (T): The demand for a commodity is greatly affected by the consumers’ tastes and preferences. Most of the people prefer to buy such commodities which are in fashion. ‘Demonstration Effect’ also plays a major role in this respect. A consumer makes his purchase decision on the basis of his surroundings. Everyone desires to buy such commodities which may increase his prestige and status among his friends and neighbours.

(5) Expectations (E): The demand for a commodity is also determined by the expectations of the consumers about the price of the commodity. If a consumer expects a commodity to be expensive in future, then its present demand will be high. On the contrary, if the commodity is expected to be cheaper, then it will be demanded in less quantum presently.

(6) Distribution of Income (D) : Among the determinants of demand, the distribution of income also holds an important place. If the income is distributed in favour of the poor people, then the demand will be more because the marginal propensity to consume of the poor is higher but if the distribution of income is in favour of the rich people, then demand will be less due to their lower propensity to consume.

Types Of Demand

(1) Composite Demand: If a commodity is used for various functions the demand of such a commodity is called composite demand. For example, milk is demanded for making sweets, curd, cheese and other domestic uses. Under composite demand, the change in demand o fa commodity by one user affects the price and supply of the commodity.

(2) Joint Demand: When two commodities are demanded at same time for satisfying a single need, such a type of demand is called joint demand. For example, demand of cigarette and matches, demand for car and petrol, etc. Joint demand is also called complementary demand.

(3) Price Demand : The demand of various quantities of a product at alternative prices is termed as price demand. Under price demand, demand  function is based on variable price and other variables of demand remain as follow constant. It has been expressed D=f(p)

(4) Income Demand: The demand of various quantities of a product at alternative levels of income is called income demand. In it, demand function is based on income and other variables of demand remain constant. The function of income and demand is called income demand function. Income demand has been expressed as follow : D=f(y)

(5) Cross Demand: The demand of various quantities of a product (x) by the consumer in relation to the change in the price of a related commodity (Y), is called cross demand. In this way, the concept of cross demand indicates the relation between the demand of a commodity and price of a related commodity.

(6) Direct Demand: If a commodity is demanded for its direct consumption, then it is called direct demand. For example, if wood is demanded as a fuel then, it will be called direct demand. Thus, direct commodity is based on the utility of the commodity.

(7) Derived Demand : Derived demand is reverse to the direct demand. If a product is demanded to produce the another product, then such type of demand is called derived demand. For example, if wood is demanded for manufacturing furniture, the demand of wood in such a condition will be called derived demand.

(8) Competitive Demand : Competitive demand represents the situation when two commodities are demanded in place of each other. Any increase in demand of a product results in the decrease in demand of other product. For example, the demand of tea and coffee is competitive demand. Competitive demand is also called substitution demand.

(9) Company Demand: The demand of the products produced by a particular firm or company is called company demand, For example, the demand of refrigerators produced by Godrej Company will be called company demand. Usually, company demand is less than the industry demand.

(10) Industry Demand: The group of firms producing a particular product is called an industry. The total demand of products produced by all the firms is called industry demand. For example, the demand of refrigerators produced by all the firms of industry such as L.G., Godrej, Samsung, etc. will be called industry demand.

(11) Short-run Demand: When a commodity is demanded for a short period, such type of demand is called short-run demand. Rapid changes take place in such a demand. This demand is based on changes in price and income.

(12) Long-run Demand : When a commodity is demanded for a long period, this demand is called long-run demand. This demand changes at a low speed. This demand is based on product improvement, price changes and technical changes. Click here for learning about Managerial Economics.

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Sarvesh Arora

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