DEMAND ANALYSIS

Ordinarily, by demand is meant the desire or want for something. In economics, however demand
means much more than that, it is effective demand i.e. the amount buyers are willing to purchase at a
given price and over a given period of time

Demand is the desire or want backed up by money. Demand 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.

Demand = Desire + Ability to pay + Willingness to spend

DETERMINANTS OF DEMAND The main determinants of demand are the following:

1. Price of the Product. The price of commodity or services directly affects its demand. The fall in the
price of a commodity leads to rise in its demand and rise in price leads to fall in its demand. Price is the
only determinant of demand in the short run.

2. Price of Related Goods. Two or more goods can be complementary or substitutes of each other. The
demand for a commodity is also affected by changes in price of its complementary or substitute good. If
two goods are substitute for each other then the increase in price of one will result in increased demand
for the other and vice-versa. E.g. Pepsi and Cocacola are substitute of each other. The rise in the price of
Cocacola increases demand for Pepsi and vice-versa.

Complementary goods are those which, are jointly demanded to satisfy a particular demand. There is
opposite relationship between price of one complementary commodity and the amount demand of the
other complementary commodity. If price of one complimentary rises, the demand for the other
complementary falls. E.g. A fall in the price of Car will lead to increase in the demand for petrol.

3. Level of Income. Income is an important determinant of demand for a commodity,ordinarily, with an

increase in income, demand for goods increase. There is a direct relationship between income and
quantity demanded. Rich consumers usually demand more and more goods than the poor customers.
Demand for luxury and expensive goods is related to the income.

4. Taste, Habits and preferences of Consumer. The demand for many goods also depends on consumer's
taste, habit and preferences. Demand for goods changes with change in fashion, habits, customs,
traditions and general life-style of the society. Demand for several products like ice-cream, chocolates
etc. depends on taste and demand tea, cigarettes, tobacco is a matter of habits.

5. Future trend of Prices. If it is expected that in future the price of a commodity will go up the demand
for the commodity in the present also will go up. If the prices are expected to fall then the demand
would fall.

6. Changes in Population. Generally the demand for a commodity increases with increase in size of
population, other things being equal, it is not merely the change in the size of population but the

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changes in the composition of population also affect the demand for certain commodities. In a country
of increasing population like India where hundreds of childrens are born daily in big cities there will
naturally be demand for toys, baby food and alike.

7. Availability of Consumer Credit. If the credit facilities are available sufficiently to consumers for the
purchase of high priced durable goods such as car, colour TV, scooters and alike, then their demand will
increase.

8. Advertisement and Salesmanship. In the modern market, advertisement greatly influence the demand
for a commodity. Infact, the demand for many products like to toothpaste, Cosmetics etc. is greatly
affected by advertisement. The best salesmanship is the one who does not merely sell what buyers want
but who makes the buyers buy what he sells

9. Inventions and Innovations. introduction of new goods or substitutes as a result of inventions and
innovations in a dynamic modern economy tends to adversely affect the demand for the existing
products.

10. Customs. demand for certain goods is determined by social customs, festivals etc., for example,
during the Dipawali days there is a great demand for sweets & during Christmas cake are more in
demand.

LAW OF DEMAND

Statement of law of demand:- “Ceteris paribus, the higher the price of a commodity, the smaller is the
quantity demanded and lower the price, larger the quantity demanded”.

The law of demand describes the general tendency of consumers behavior in demanding a commodity
in relation to the changes in its price. The Law of demand expresses the relationship between price and
quantity demanded of a commodity. According to the law of demand the demand of a commodity
extends with fall in its price and contracts with rise in the price, other things being constant. 'Other
things being constant' means that the other determinates of demand except price remain unchanged. it
explains the inverse relationship between price and quantity demanded

Chief Characteristics of the Law of Demand The following are the chief characteristics of the Law of
Demand.

1. Inverse Relationship. The relationship between price and the demand of a particular commodity is
inverse i.e., the demand of a commodity will fall with the increase in the price of the commodity or it
will increase with the fall in-the price.

2. Price an Independent Variable and Demand a Dependent Variable. In the Law of Demand, price is
regarded as an independent variable that affects the demand inversely. Thus, it is the effect of price on
demand that is to be examined and not the effect of demand on price.

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3. It is a Qualitative Statement. The Law of Demand simply explains the direction of change in the
demand with the increase or decrease in the price of a commodity. It does not explain the quantum of
change. The law is thus, a qualitative statement? and not a quantitative statement

. 4. Other thing remains the same. The Law of Demand applies only when other things remain the same.
In other words, there should be no change in factors influencing demand except price.

A market demand schedule

ASSUMPTIONS OF THE LAW OF DEMAND: The Law of Demand is based on the following assumptions

(1) No change in taste, habits, preferences : It is assumed that there is no change in the taste,
habits, preferences of a rational consumer. Thus, consumers' choice of product must remain the
same
(2) No change in the income level: If the consumer's income rises, he will demand more though the
prices of commodities rise. In such a situation, the law will not hold good.
(3) No change in population : The law is based on the assumption that there should be no change in
population, size, sex ratio, age composition, etc.

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 (4) No change in prices of related goods : The law assumes that the prices of close substitutes and
the complementary products should remain constant.
(5) No expectation of future change in the price: If the consumers expect high rise in the price in
future, they demand more though current price is high. In such condition, the Law of Demand
cannot be verified
(6) No change in technology : The law assumes that the present technology of production remains
constant.
EXCEPTIONS TO THE LAW OF DEMAND Followings are the exceptions of the law of demand :
1. Giffen Goods: Some special varieties of inferior goods are termed as Giffen goods. Sir Robert
Giffen of Ireland first observed that people used to spend more of their income on inferior
goods like potato and less of their income on meat. After purchasing potato the staple food,
they did not have staple food potato surplus to buy meat. So the rise in price of potato
compelled people to buy more potato and thus raised the demand for potato. This is against
the law of demand. This is also known as Giffen paradox.
2. Conspicuous Consumption / Veblen Effect: This exception to the law of demand is
associated with the doctrine propounded by Thorsten Veblen. A few goods like diamonds
etc are purchased by the rich and wealthy sections of society. The prices of these goods are
so high that they are beyond the reach of the common man. The higher the price of the
diamond, the higher its prestige value. So when price of these goods falls, the consumers
think that the prestige value of these goods comes down. So quantity demanded of these
goods falls with fall in their price. So the law of demand does not hold good here.
3. Necessities: Certain things become the necessities of modern life. So we have to purchase
them despite their high price. The demand for T.V. sets, automobiles and refrigerators etc.
has not gone down in spite of the increase in their price. These things have become the
symbol of status. So they are purchased despite their rising price.
4. Emergencies: During emergencies like war, famine etc, households behave in an abnormal
way. Households accentuate scarcities and induce further price rise by making increased
purchases even at higher prices because of the apprehension that they may not be
available. . On the other hand during depression, , fall in prices is not a sufficient condition
for consumers to demand more if they are needed.
5. Future Changes In Prices: Households also act as speculators. When the prices are rising
households tend to purchase large quantities of the commodity out of the apprehension
that prices may still go up. When prices are expected to fall further, they wait to buy goods
in future at still lower prices. So quantity demanded falls when prices are falling.
6. Snob Effect: Some buyers have a desire to own unusual or unique products to show that
they are different from others. In this situation even when the price rises the demand for
the commodity will be more

Types of Demand

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 a) Joint demand and Composite demand: when two goods are demanded in conjunction with one
another at the same time to satisfy a single want, it is called as joint or complementary demand.
(example: demand for petrol and two wheelers) A composite demand is one in which a good is
wanted for several different uses. ( example: demand for iron rods for various purposes)On the
other hand demand for goods that are used by producers for producing goods and services.
(example: Demand for cotton by a textile mill)
b) Derived demand and autonomous demand: when a produce derives its usage from the use of
some primary product it is known as derived demand. (example: demand for tyres derived from
demand for car) Autonomous demand is the demand for a product that can be independently
used. (example: demand for a washing machine)
c) Durable and non durable goods demand: durable goods are those that can be used more than
once, over a period of time (example: Microwave oven) Non durable goods can be used only
once (example: Band-aid)
d) Short run and long run demand: short run demand refers to demand with its immediate
reaction to price changes and income fluctuations. Long run demand is that which will ultimately
exist as a result of the changes in pricing, promotion or product improvement after market
adjustment with sufficient time.
e)

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