by Demand refers to the quantity of a commodity that consumers are willing and able to purchase at a particular price during a given period of time. In economics, demand is not merely desire. A person may want a car, but if he does not have enough money to buy it, it will not be considered demand. Therefore, demand includes three elements: desire for a product, willingness to buy and ability to pay.
Demand always relates to a specific price and a specific time period. Hence, demand is an economic concept that reflects actual purchasing power of consumers.
Individual Demand and Market Demand
Individual demand means the quantity of a commodity demanded by a single consumer at various prices. It shows how a particular person reacts to changes in price.
Market demand means the total quantity demanded by all consumers in the market at various prices. It is obtained by adding individual demands of all consumers. Business firms mainly focus on market demand because production and pricing decisions depend on total demand in the market.
Functions of Demand
The demand function expresses the relationship between quantity demanded of a commodity and the factors influencing it. It shows that demand is not determined only by price but also by income, tastes, prices of related goods and other variables. Mathematically it is written as:
Qd = f (P, Y, T, Pr, A, E, N)
Where Qd is quantity demanded, P is price, Y is income, T is taste, Pr is related goods’ prices, A is advertising, E is expectations and N is population.
- Price of the Commodity
Price is the most important determinant of demand. According to the law of demand, when the price of a commodity falls, quantity demanded increases, and when price rises, quantity demanded decreases, other factors remaining constant. Consumers prefer to buy more at lower prices because purchasing power increases. Therefore, price and demand have an inverse relationship. Managers carefully analyze price changes because even a small change in price can significantly affect sales volume and revenue.
- Income of Consumers
Consumer income strongly influences demand. When income increases, people can afford to purchase more goods and services, so demand rises. Such goods are called normal goods. However, in the case of inferior goods, demand decreases as income increases because consumers shift to better quality products. Therefore, the relationship between income and demand may be direct or inverse depending on the nature of the product. Firms consider income levels while targeting markets and planning production.
- Prices of Related Goods
Demand also depends on prices of related goods, which include substitutes and complementary goods. Substitute goods are alternatives like tea and coffee. If the price of tea increases, demand for coffee increases. Complementary goods are jointly used goods like car and petrol. If petrol price rises, demand for cars may fall. Therefore, managers must observe the price movements of related goods because they directly influence the demand for their product.
- Tastes and Preferences
Consumer tastes, fashion and preferences significantly affect demand. Changes in lifestyle, habits and social trends may increase or decrease demand for a product. For example, increasing health awareness has increased demand for organic food and reduced demand for junk food. Advertising and branding also influence consumer preferences. Firms continuously study consumer behavior so they can modify product features and marketing strategies according to changing preferences and maintain market demand.
- Population and Demographic Factors
Population size and structure also determine demand. A larger population means more potential buyers, leading to higher demand. Age composition, gender ratio and urbanization also influence demand patterns. For example, demand for educational services increases with a higher young population, while healthcare demand rises with an aging population. Businesses analyze demographic trends to identify future opportunities and design products suitable for specific consumer groups.
- Expectations about Future Prices
Consumer expectations regarding future prices affect present demand. If people expect prices to rise in the future, they buy more now, increasing current demand. Conversely, if they expect prices to fall, they postpone purchases, reducing present demand. Such behavior is common in real estate, gold and electronic goods markets. Managers monitor market expectations and economic conditions to adjust pricing and production strategies accordingly.
- Advertising and Sales Promotion
Advertising and promotional activities influence demand by informing consumers and creating interest in a product. Effective advertising increases product awareness, builds brand loyalty and encourages purchase decisions. Sales promotions such as discounts, coupons and special offers also increase demand in the short run. Companies invest heavily in advertising to shift the demand curve upward and expand market share. Thus, marketing communication plays a significant role in determining demand.
Change in Demand
Change in demand refers to an increase or decrease in the quantity demanded of a commodity due to factors other than its own price. It occurs when determinants like income, tastes, population, expectations or prices of related goods change. In this case, the entire demand curve shifts to a new position. Thus, change in demand is different from change in quantity demanded, which is caused only by change in price.
Increase in Demand (Expansion of Demand Curve Shift Right)
Increase in demand means consumers are willing to purchase more quantity of a commodity at the same price. Graphically, the demand curve shifts to the right. This situation arises when income rises, population increases, favorable tastes develop or price of substitute goods increases. For example, growing health awareness increases demand for fruits even when price remains unchanged. Firms respond by increasing production and supply to meet higher consumer demand.
Decrease in Demand (Contraction of Demand Curve Shift Left)
Decrease in demand means consumers purchase less quantity at the same price. The demand curve shifts to the left. This occurs when income falls, tastes change unfavorably, population declines or price of complementary goods rises. For example, if fuel price rises sharply, demand for cars may decrease even though car prices remain unchanged. Businesses may reduce output or revise marketing strategies to adjust to falling demand.
Causes of Change in Demand
Several factors cause change in demand:
Income: Higher income increases demand for normal goods but decreases demand for inferior goods.
Tastes and Preferences: Changes in fashion, lifestyle and habits affect consumer choices.
Population: More population increases market demand.
Expectations: Anticipation of future price rise increases present demand.
Prices of Related Goods: Change in substitutes or complements affects demand.
These factors shift the demand curve rather than moving along it.
Change in Demand vs Change in Quantity Demanded
It is important to distinguish the two concepts.
Change in quantity demanded occurs due to change in price of the commodity and leads to movement along the same demand curve. It includes expansion and contraction of demand.
Change in demand occurs due to other factors besides price and causes a shift of the entire demand curve either rightward or leftward.
Managers must identify the correct cause to make proper business decisions.
