DEMAND ANALYSIS

Introduction

Economics is a study of market that comprises a group of buyers and

sellers of a particular product or service. The working of the market system is
governed by two forces, demand and supply. These two forces play a crucial
role in determining the price of a product and size of the market.

“The demand for goods is schedule of the amounts that buyers would be willing
to purchase at all possible prices at any one instant of time”-Prof Mayers.

Meaning of Demand

The word 'demand' is so common and familiar with every one of us that
it seems unnecessary to define it. The need for precise definition arises simply
because it is sometimes confused with other words such as desire, wish, want,
etc. it is significant to know about demand. Generally, people refer to the want
or the desire for a thing as demand. But more desire for a thing is not demand
in economics. However, demand in economics necessitates three things, such
as:

✓ Desire for a commodity

✓ Willingness to buy and
✓ The purchasing power to pay or ability to pay

Demand refers to the willingness or ability of a buyer to pay for a particular

product. In other words demand can be defined as the quantity of a product
that a buyer desires to purchase at a specific price and time period.

For instance, if an individual desires to purchase a resort and does not

have adequate amount of money to purchase the resort, his/her desire is not
considered as demand for the resort Apart from It, if an affluent individual
desires to purchase a resort, but does not have willingness to spend money
for purchasing the resort then his/her desire is also not considered as
demand.

Therefore, we can say that effective demand is the desire backed by the
purchasing power and willingness of an individual to pay for a particular
product. An effective demand has three characteristics namely, desire,
willingness, and ability of an individual to pay for a product.
Definition of Demand

Theoretically, demand can be defined as a quantity of a product an

individual is willing to purchase at a specific point of time.

o According to Alfred Marshall, states that “The greater the amount to

be sold, the smaller must be the price at which, it is offered in order
that it may find purchasers: or, in other words, the amount demanded
increases with a fall in price and diminishes with rise in price”.
o According to Prof. Benham, “The demand for anything at a given price
is the amount of it which will be bought per unit of time at that price”.
o According to Chapma, “Demand is the quantitative expression of
preferences”
o According to Hibdon, “Demand means the various quantities of a good
that would be purchased per time period at different prices in a given
market”

Features of Demand

I. Demand depends upon utility of the commodity. A consumer is

rational and demands only those commodities which provide
utility.
II. Demand always means effective demand, i.e. demand for a
commodity or the desire to own a commodity should always be
backed by purchasing power and willingness to spend it.
III. Demand is a flow concept, i.e. so much per unit of time.
IV. Demand means demand for final consumer goods
V. Demand is a desired quantity. It shows consumer’s wish or need
to buy the commodity.

The Demand Function

The demand function, which shows the functional relationship between

the demand for a commodity and its several determinants, can be written as
below:

Dx = f {Px, Ps, M, T, W, …...N}

Where,

Dx = The quantity demanded of good X

Px = Price of good X

Ps = Price of related goods

M = Money income of the consumers

 T = Tastes and preferences of the consumers

W = Wealth of the consumers

N = The Number of factors

The quantity of good X demanded varies inversely with Px while Ps, M,

T and W are held constant. A simple and commonly used demand function is

Dx = f {Px}

Which shows that the demand for a commodity is the function of its
price.

Demand Schedules and Demand Curves

Demand schedule is a table or statement showing how much of a

commodity is demanded in a particular market at different prices. In other
words, demand schedule refers to the response of amount demanded to
change in price of commodity. It summarises the information on prices and
quantity demanded.

Economists commonly speak of two types of Demand Schedules:

A. Individual Demand Schedule

B. Market Demand Schedule

A. Individual Demand Schedule:

An individual consumers’ demand refers to the quantities of a commodity

demanded by him at various prices or different prices, considering other
things being equal. It refers to the series of quantities he is prepared to buy
at different prices. This can be illustrated with the help of a schedule. The
following is an imaginary demand schedule of a consumer for Ice Cream.

Price of Ice cream Quantity Demanded

(Rs) (Px) (Units) (Dx)
1 5
2 4
3 3
4 2
5 1

From the above table, it is seen that as the price of ice cream goes on
increasing, the quantity demanded goes on falling. when price is Rs.5 per cup,
then the consumer demands one cup but when the price falls to Rs.1 per cup,
the demand for the consumer goes up to 5 cups. Thus, we can conclude that
as the price falls the demand increases and as the price raises the demand
decreases. Hence, there exists an inverse relationship between the price and
quantity demanded.

Individual Demand Curve:

It refers to the quantity demanded by the consumer at different levels
of prices. In fact, demand curves are only a graphical representation of
demand schedule. The relation between the price and the amount bought can
be plotted on a diagram as a demand curve. It is usual to measure quantity
demanded on X axis and price on Y axis.
The imaginary demand curves based on the imaginary schedule will be
always slope downwards to the right indicating that more quantities will be
bought at a lower price than at a higher price with other conditions of demand
remaining the same.

In the above figure OX axis measures the different quantities of Ice

Cream demanded and OY axis refer price per unit of Ice Cream. DD is the
demand curve. At the price of Rs. 5, the quantity demanded is 1. As the price
falls to Rs.1, the quantity demanded increases to 5. Moreover, the demand
curve slopes downward from left to right which indicates that there is inverse
correlation between price and quantity demanded.

B. Market Demand Schedule

In a market, there is not one consumer but many consumers of commodity.

Market demand schedule refers to different quantities of a commodity that all
other consumers in the market are ready to buy at different possible prices of
the commodity at a point of time. It is summation of demanded of all persons
of a homogeneous commodity. Basically, the market demand schedule depicts
the functional relationship between the list of prices and quantity demanded.

Suppose that the market for oranges consists of four consumers, the
market demand is calculated as follows:
 Market Demand Schedule for Oranges

Price of C’s D’s Aggregated

A’s B’s
Oranges Demand Demand Market
Demand Demand
(Rs) (Px) Demand
25 1 2 0 0 3
20 2 4 1 0 7
15 3 5 2 1 11
10 4 5 3 2 14
5 5 5 4 3 17

Consumer A is our average consumer. Consumer B is probably a rich

consumer. On the other hand, consumer C and D are poor. They start
demanding at only low prices. This method of estimating market demand will
be accurate but is obviously bulky. For, there are not four consumers in a
market for a product, but thousands and often millions of consumers. It will
be a problem to add up the demands of millions of consumers.

Factors affecting demand/ Determinants of Demand

The demand for a good depends on several factors, such as price of the
good, perceived quality, advertising, income, confidence of consumers and
changes in taste and fashion.

Factors which can shift the demand curve

A shift to the right in the demand curve can occur for a number of reasons:
1. Income. An increase in disposable income enabling consumers
to be able to afford more goods. Higher income could occur for a
variety of reasons, such as higher wages and lower taxes.
2. Credit facilities. If it is easier and cheaper to borrow, this may
encourage consumers to buy expensive items on credit, for
example, cars and foreign holidays.
3. Quality. An increase in the quality of the good e.g. better quality
digital cameras encourages people to buy one.
4. Advertising can increase brand loyalty to goods and increase
demand. For example, higher spending on advertising by Coca
Cola has increased global sales.
5. Substitutes. An increase in the price of substitutes, e.g. if the
price of Samsung mobile phones increases, this will increase the
demand for Apple iPhones – a major substitute for the Samsung.
6. Complements. A fall in the price of complements will increase
demand. E.g. a lower price of Play Station 2 will increase the
demand for compatible Play Station games.
7. Weather: In cold weather, there will be increased demand for
fuel and warm weather clothes.
8. Expectations of future price increases. A commodity like gold
may be bought due to speculative reasons; if you think it might
go up in the future, you will buy now.
9. Change in circumstances. The Covid lockdown of 2020/21 led
to a significant fall in demand for leisure and going out to the
cinema, but it led to a boom in demand for electrical goods, like
TVs and Netflix subscriptions.
10. Economic cycle. In a recession, people will cut back on
spending, even if their income remains steady. This is because
they fear the possibility of losing job, so they will take risk averse
approach and reduce spending. Similarly in an economic boom,
confidence will be high and incomes rising – causing more
demand
11. Wealth-effect. If households experience an increase in
their wealth (e.g. house prices rise), then they will be more willing
to spend. This is because they can re-mortgage their house to get
equity withdrawal and/or they will feel more confidence because
they own more assets.