What is Demand? Determinants, Types, and Importance

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What is Demand in Economics?

Demand in Economics is an economic principle that can be defined as the quantity of a product that a consumer desires to purchase goods and services at a specific price and time.

Factors such as the price of the product, the standard of living of people, and changes in customers’ preferences influence the demand. The demand for a product in the market is governed by the Laws of Economics.

Demand Definition

The word ‘demand’ is used to imply the quantity (how much) of a given commodity or service, the consumers are willing and able to buy, in a market during the particular period of time, at any price, or at any income or at any price of related goods.

Demand is not just the desire for the commodity, rather when the desire is supported by the means to purchase, the willingness of the consumer to use those means to buy the commodity, and purchasing power of the consumer, then only it is termed as demand.

Determinants of Demand

1. Price of the Commodity: Other things being constant, there is an inverse relationship between the commodity’s price and its demand, i.e. an increase in the price of the commodity, results in the decrease in its demand, and vice versa. 

For instance: The rise in the price of detergent produced by A Ltd. will decrease its demand, as the price-sensitive consumers may choose detergent produced by some other company over the detergent produced by A Ltd.

2. Price of Related Goods: Related goods refer to the goods whose change in price may change the quantity demanded of a commodity. The related goods are classified as:

3. Complementary Goods: The products which are used or taken together or simultaneously are called complementary goods. 

For instance: Shampoo and Conditioner wherein a fall in the price of Shampoo leads to the rise in the demand of Conditioner.

4. Competing Goods: When two commodities share similar wants and can be used interchangeably are called as Competing Goods or Substitute Goods.

For instance: Soap or Shower Gel wherein a fall in the price of Shower Gel results in the fall in quantity demanded of its Soap. So, there is a direct relationship between demand for the commodity and the price of its substitutes.

5. Income of the Consumer: Other things remain constant, the income level of the consumer also influences the demand for a commodity, as the buying power of the consumer depends on the income level itself.The nature of consumer goods decides the nature of the relationship between income and the quantity demanded. As the income of the consumer increases, the consumer wants more of a given commodity, but this is not true in all the situations, as in case of inferior goods, where the rise in the level of income leads to decrease in its demand, because the consumer switch to better quality product, which they can afford after the rise in their income.

6. Consumer Expectations: When the price of a particular commodity, is expected to rise in the near future, the demand for that good, goes up, for that particular time. In the same way, when the price of a commodity is expected to fall, the demand for it usually comes down, as the customers will postpone the purchase. 

For instance: If the gold prices are expected to rise in the coming time, then its demand increases for that duration.

7. Tastes and Preferences of Consumer: The tastes and preferences of the consumer also have a significant effect on the demand for its commodity. We all know that when something is in fashion, it is high in demand, which may change over a period of time.
   For instance: With the introduction of 5G technology handsets in the market, the demand for 4G smartphones has been reduced.
   1. Demonstration Effect: A person’s demand for a particular good or service is also influenced by his seeing his relative, friend, colleagues, neighbours consuming it. There are two main reasons behind it, i.e. by seeing the other person consuming it, the individual also gets the desire to consume the same, or he/she thinks that if his relative can afford it, then he/she can also afford it. This is called a Demonstration Effect.
   2. Snob Effect: The opposite of the demonstration effect is the snob effect, which says that if a commodity is common among all the people, some people will stop using it, leading to the decrease in overall demand.
   3. Veblen Effect: Goods which are high in price is a status symbol for rich people and so are consumed by that class only, to fulfil their need for prestige. This is called a Veblen Effect.

In addition to the above factors, there are factors like the size of the population, the composition of the population, national income, and its distribution, which also affect the demand for a commodity.

Types of Demand in Economics

7 Types of Demand in Economics are:

1. Price Demand
2. Income Demand
3. Cross Demand
4. Individual demand and Market demand
5. Joint Demand
6. Composite Demand
7. Direct and Derived Demand

Price Demand

Price demand is a demand for different quantities of a product or service that consumers intend to purchase at a given price and time period assuming other factors, such as prices of the related goods, level of income of consumers, and consumer preferences, remain unchanged.

Price demand is inversely proportional to the price of a commodity or service. As the price of a commodity or service rises, its demand falls and vice versa.

Therefore, price demand indicates the functional relationship between the price of a commodity or service and the quantity demanded. It can be mathematically expressed as follows:

Therefore, price demand indicates the functional relationship between the price of a commodity or service and the quantity demanded. It can be mathematically expressed as follows:

D_A= f (P_A) where,
D_A = Demand for commodity A
f = Function
P_A =Price of commodity A

Income Demand

Income demand is a demand for different quantities of a commodity or service that consumers intend to purchase at different levels of income assuming other factors remain the same.

Generally, the demand for a commodity or service increases with an increase in the level of income of individuals except for inferior goods. Therefore, demand and income are directly proportional to normal goods whereas demand and income are inversely proportional to inferior goods.

The relationship between demand and income can be mathematically expressed as follows:

D_A = f ( Y_A ), where,
D_A = Demand for commodity A
f = Function
Y_A = Income of consumer A

Cross Demand

Cross demand is refers to the demand for different quantities of a commodity or service whose demand depends not only on its own price but also the price of other related commodities or services.

For example, tea and coffee are considered to be the substitutes of each other. Thus, when the price of coffee increases, people switch to tea. Consequently, the demand for tea increases. Thus, it can be said that tea and coffee have cross demand.

Mathematically, this can be expressed as follows:

D_A = f (PB), where,
D_A = Demand for commodity A
f = Function
P_B = Price of commodity B

Individual demand and Market demand

Individual demand and market demand: This is the classification of demand based on the number of consumers in the market. In dividual demand refers to the quantity of a commodity or service demanded by an individual consumer at a given price at a given time period.

For example, the quantity of sugar that an individual or household purchases in a month is the individual or household demand. The individual demand of a product is influenced by the price of a product, the income of customers, and their tastes and preferences.

On the other hand, market demand is the aggregate of individual demands of all the consumers of a product over a period of time at a specific price while other factors are constant.

Joint Demand

Joint demand is the quantity demanded two or more commodities or services that are used jointly and are, thus demanded together.

For example, car and petrol, bread and butter, pen and refill, etc. are commodities that are used jointly and are demanded together.

Composite Demand

Composite demand is the demand for commodities or services that have multiple uses. For example, the demand for steel is a result of its use for various purposes like making utensils, car bodies, pipes, cans, etc.

For example, the demand for steel is a result of its use for various purposes like making utensils, car bodies, pipes, cans, etc. In the case of a commodity or service having composite demand, a change in price results in a large change in the demand. This is because the demand for the commodity or service would change across its various usages.

Direct and Derived Demand

Direct and derived demand: Direct demand is the demand for commodities or services meant for final consumption. This demand arises out of the natural desire of an individual to consume a particular product.

For example, the demand for food, shelter, clothes, and vehicles is direct demand as it arises out of the biological, physical, and other personal needs of consumers.

On the other hand, derived demand refers to the demand for a product that arises due to the demand for other products.

For example, the demand for cotton to produce cotton fabrics is derived demand.

Importance of Demand

Demand is considered the basis of the entire process of economic development, hence demand plays an important role in the economic, social and political fields.

The importance of demand are:

1. Importance in Consumption
2. Advantageous to producers
3. Importance in Exchange
4. Importance in Distribution
5. Importance in Public Finance
6. Importance of Law of Demand and Elasticity of Demand
7. Importance in Religion, Culture and Politics