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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
TYPES OF DEMAND
For Example,
Replacement Demand
Goods like Television, Machinery, watches,
furnitures are the eg of durable consumer
goods; they are purchased to be used for a
long period of time
Due to use or obsolescence of technology;
thus they need replacement.
All capital goods like machinery also need
Replcement.
Competing demand
There are goods which compete with each
other because they are substitutes.
If you are thirsty you may opt for water, or
coke, or pepsi or juice
Because they can independently satisfy
your want to quench thirst.
When a consumer is indifferent between
two goods, they are called as close
substitutes.
For Eg.,
Your demand for Indica is an example of
individual demand.
The total sale of Indica in a year, 2010, is
the annual market demand,
Total demand for cars in a year is industry
demand for one year.
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.
Demand Function
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.
OnlineTexts.com p. 24
Demand Curve
Income Effect:
The fall in the price is equivalent to an
increase in the income of the consumer
and this gives the effect of increase in real
income for him to purchase more.
Substitution Effect:
If the price of a commodity falls, it will be
substituted for costlier things and so the
quantity demanded will go up.
Giffen Goods:
Robert Giffen discovered that the poor
people will demand more of inferior goods
if their prices rise & demand less if their
prices fall.
They reduce the expenditure on other
superior items, to conserve their little
income, & demand more of the inferior
commodity
Giffen goods means Inferior goods
Speculative goods:
In the speculative market, particularly in
stocks & shares, more will be demanded
when the prices are rising and less will be
demanded when the price declines.
Snob Appeal:
Opposite to Giffen goods, (veblen goods)
there are certain goods which have snob
value, for which the consumer measures the
satisfaction derived from these commodities
not by their utility value, but by social
status.
Thus in this case, price & quantity move in
the same direction.
Eg: Diamond or antique works of art, latest
model mobile phones, sport cars,
Demand Schedules
SUPPLY
Determinants of Supply
Production technology
Price factors of production
Prices of other products
Future price expectations
Definition of supply
OnlineTexts.com p. 40
Supply Curve
Equilibrium
OnlineTexts.com p. 42
Equilibrium