DEMAND DETERMINANTS

Demand Function

What is Demand?
Demand for a commodity refers to the desire
backed by willingness and ability to buy a
particular commodity, in a given period of
time.

Meaning of Demand
The amount the buyers are willing to purchase
at a given price and over a given period of
time.
It means effective desire or want for a
commodity, which is backed up by the ability
(i.e., money or purchasing power) and
willingness to pay for it.
In short, Demand= Ability to pay (Money or
Purchasing power) + will to spend

Factors Influencing Demand:

Price of the Product:
Demand = ability to pay+willingness to pay
Price has a negative effect on demand.
If the price of the product increases, its
quantity demanded will fall.
Alternatively, if the price of the product
increases, its quantity demanded will fall.

Factors contd..,
Income of the Consumers:
Demand is depending upon the paying
capacity of the consumer.
Income bears the positive relationship with
demand,
When income increases demand also
increases due to paying capacity of the
consumer.

Factors contd..,
Price of related goods:
Demand for a commodity not only depends
on the price of that particular commodity,
but also on the price of other related
commodities.
Eg: car & petrol, Tea & coffee

Factors contd..,
Tastes & preferences:
Age, gender, education, profession, social
cultural norms, advertising etc., play a role
in developing tastes & preferences.
For example, cars & gifts industry has
gained significantly due to
internationalization of events like Valentine
day, Friendship day etc..,

Factors contd..,
Advertising:
Firms incur heavy expenditure on
advertising to general awareness about the
features, price, and uniqueness of their
products.
The primary motive behind advertising is to
stimulate demand for own brand.
For Eg., vodafone

Factors contd..,
Consumers Expectation of Future Income
and Price:
Consumers do not make purchases only on
the basis of current income & current price
structure.
In case of durables, when demand can be
postponed, customers decide their purchase
on the basis of future price & income

Factors contd..,
Population:
If the population of a country is constantly
increasing, more food items and other
goods and services will be needed to satisfy
the needs of the people

Factors contd..,
Growth of Economy:
If an economy is growing, it will have
increased demand for goods of better
quality.
Consumers will have higher paying
capacity and greater willingness to pay
higher price for quality.

Law of Demand
The Law of Demand indicates the
relationship between the price of a
commodity and the quantity demanded in
the market.
It means that a person will purchase more of
a commodity when its price falls and he will
purchase less of it when its price rises.

Definition of Law of Demand

Marshall defined,
the amount demanded increases with a fall
in price and diminishes with a rise in price.

The Law of Demand

The law of demand holds that other things

equal, as the price of a good or service rises, its
quantity demanded falls.
The reverse is also true: as the price of a good or
service falls, its quantity demanded increases.

OnlineTexts.com p. 14

Demand Curve

The demand curve has a negative slope, consistent with

the law of demand.
OnlineTexts.com p. 15

SUPPLY

Supply means the quantity of goods offered

for sale at a particular price at a certain
point of time.

Supply always relates to a price.

Determinants of Supply
Production technology
Price factors of production
Prices of other products
Future price expectations

Definition of supply

Supply has been defined as other things

equal, the quantity supplied of a commodity
increases when the price increases and the
quantity supplied of a commodity decreases
when the price decreases.

The Law of Supply

The law of supply holds that other things equal,
as the price of a good rises, its quantity
supplied will rise, and vice versa.
Why do producers produce more output when
prices rise?

They seek higher profits

They can cover higher marginal costs of production

OnlineTexts.com p. 19

Supply Curve

The supply curve has a positive slope, consistent with

the law of supply.
OnlineTexts.com p. 20

Equilibrium

In economics, an equilibrium is a situation in

which:
quantity demanded equals quantity supplied, and
the market just clears.

OnlineTexts.com p. 21

Equilibrium

Equilibrium occurs at a price of $3 and a quantity of 30

units.
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