Demand
TOPICS - DEMAND, DETERMINANTS, DEMAND FUNCTION
Theory of Demand
I was passing by a garment shop, suddently I saw a beautiful T-shirt hanging, the shirt was so beautiful, that I couldn’t prevent myself from entering the shop. I entered, the first thing I saw was the price tag, it said Rs.10,000/- !!!!!!! I saw the shirt for the last time and came out of the shop!!!!
“MAN IS A BUNDLE OF DESIRES” and this is human nature. This desire to have something becomes demand if we have the ability and willingness to buy it.
Thus Demand is the desire to acquire something backed by purchasing power.
DEMAND = DESIRE + PURCHASING POWER.
Determinants of Demand
Let us now discuss the factors on which demand depends. From the previous discussion it is clear that there are two main things on which demand depends they are Desire & Purchasing Power. The determinants will either affect desire or purchasing power or both, thereby affect Demand. They are
a) Price of the commodity (Px) ; The most important determinant of demand is price of the commodity. As things become expensive, our purchasing power reduces (assuming our income to be constant) therefore demand is affected.
b) Income of the consumer (I) ; As our income increases our purchasing power also increases, there our demand increases.
c) Taste & Preferences (T) ; This is the only qualitative determinant of demand. Demand is very much affected by taste and preferences of the consumer, if we don’t prefer a thing, then what ever be the condition, we don’t want it, thus no demand vice-versa.
d) Price of related goods (PY,Z) ; related goods are those goods which are related to the commodity concerned. There are two types of such goods namely substitutes and compliments.
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Substitutes |
Compliments |
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Those goods that goes in place of the commodity concerned. They serve almost the same purpose as the commodity concerned. Therefore as the price of such goods falls people will buy those goods and thus purchase the commodity concerned less. This is how price of substitutes affects demand for the commodity. Examples ; Tea and coffee |
Those goods that goes along with the commodity concerned. People buy the bundle otherwise the commodity concerned is useless. Thus as the price of complimentary goods increases, the bundle becomes expensive and therefore people by the bundle less……therefore the demand for the commodity concerned falls. Example: Printer and cartridges |
e) Price Expectations (Pe) ; price expectation also plays an important role in determining demand for a commodity. If there is a forecast/ expectation that price of the commodity will increase in future, people will buy the commodity today, therefore the demand for the same increases… vice versa.
f) Government Policies (G) ; Government policies like tax/subsidies affects price of the commodity and the price affects demand for the commodity. Therefore, government policies affect demand for the commodity indirectly. Another thing is that if government approves a commodity, it increases the faith of the consumers and therefore the demand for the product increases.
Demand Function
We have found that there are many things on which demand for a commodity depends.
There exist an algebraic or functional relationship between demand and its determinants, this functional relationship between demand and its determinants is known as demand function.
DX = f (PX, I, T, PY,Z, PE, G……….)