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Definition: The total quantity that all the individuals are willing to and are able to buy at a given price,
other things remaining the same is called as Market Demand. In other words, Market Demand refers to
the sum of individual demands for a product at a given price per unit of time.
What is Individual Demand? Individual demand refers to the quantity of a commodity demanded by
an individual per unit of time, at a given price. The aggregate of individual demands for a product per
unit of time constitutes the market demand. The market demand schedule and the curve can be obtained
if the individual demand schedules or individual demand functions are known. Thus, the demand curve
can be derived by adding up:
30 0 0 0 0
25 5 0 0 5
20 10 5 0 15
15 15 10 5 30
10 20 15 10 45
5 25 20 15 60
Definition: The Demand Analysis is a process whereby the management makes decisions with respect
to the production, cost allocation, advertising, inventory holding, pricing, etc. Although, how much a firm
produces depends on its production capacity but how much it must endeavor to produce depends on the
potential demand for its product.
Thus, the marketer is required to analyze properly the demand for its product in the market and must
hold inventory accordingly. Such as if there is a potential demand in the future, then the firm should hold
more inventories and in case there is no demand, then the production remains unwarranted, and hence,
lesser inventories are held. There is a possibility that production might exceed the demand, then the
marketer must use alternative ways such as better advertisements to create a new demand.
The demand shows the relationship between two economic variables, the price of the product and the
quantity of product that a consumer is willing to buy for a given period of time, other things being equal.
Features/Characteristics of Demand
The following are the main features or characteristics of demand that the marketer must keep in mind
while analyzing the demand for its product:
• The demand is the specific quantity that a consumer is willing to purchase. Thus, it is
expressed in numbers.
• The demand must mean the demand per unit of time, per month, per week, per day.
• The demand is always at a price, e. any change in the price of a commodity will bring about a
certain change in its quantity demanded.
• The demand is always in a market, a place where a set of buyers and sellers meet. The market
needs not to be a geographical area.
Thus, demand plays a crucial role in the success of any business enterprise. And it must be remembered
that demand is always at a price and a particular time period in which it is created. Such as demand for
woolen clothes will be more in winters than in any other season. Hence, demand analysis is always done
in terms of the price and the relevant time period.
Ref: https://businessjargons.com/demand-analysis.html
Law of Demand
Definition: The Law of Demand asserts that there is an inverse relationship between the price, and the
quantity demanded, such as when the price increases the demand for the commodity decreases and
when the price decreases the demand for the commodity increases, other things remaining unchanged.
In the definition, the “other things” are the factors that influence the demand such as consumer’s
income, price of related goods, consumer’s tastes and preferences, advertisement, etc. The law of
demand can be further illustrated by the Demand Schedule and the Demand Curve.
Demand Schedule: The demand schedule is a tabular presentation of series of prices arranged in some
chronological order, i.e. either in ascending or descending order along with their corresponding quantities
which the consumers are willing to purchase per unit of time. A hypothetical daily demand schedule for
the commodity (Wheat) is given below:
15 2 A
14 3 B
13 4 C
12 5 D
11 6 E
10 7 F
9 8 G
The table clearly illustrates the law of demand, i.e. the demand for wheat increases as its price
decreases. For example, at price Rs 14/kg only 3 kg of wheat is demanded, but as the price decreases to
Rs 13/kg the quantity demanded increased to 4 kg.
Demand Curve: Demand curve is formed when the demand and price data in the demand schedule is
plotted on a graph. Thus, the demand curve is the
graphical representation of the demand schedule.
The above demand schedule is represented
graphically in the figure below:
Definition: The Law of Demand explains the downward slope of the demand curve, which posits that
as the price falls the quantity demanded increases and as the price rise, the quantity demanded
decreases, other things remaining unchanged.There are several factors that explain why the demand
curve slopes downward or why the law of demand showing an inverse relation between the price and
quantity is valid?
Definition: The Law of Supply posits that there is a positive relationship between the supply of a
commodity and its price, such that the supply of the commodity increases with the increase in its price
and decreases with the fall in its price, other things remaining constant.
Here, “other things” are the factors that influence the supply of the commodity such as technology,
input prices, price of related products, nature and size of the industry, government policy, etc. The law of
supply is based on the notion, that as the price of a product increases the suppliers with an objective to
maximize their profits increases the production of a commodity for sale.
The concept of the law of supply can further be illustrated by Supply Schedule and Supply Curve.
Supply Schedule: The supply schedule is the tabular representation of the different prices of the
commodity and the corresponding quantities that the suppliers are willing to offer for sale. A hypothetical
daily supply schedule of rice is given below:
Supply of Rice/day
Price of Rice/Kg Price quantity combinations
(In Kg)
10 5 A
11 6 B
12 7 C
13 8 D
14 9 E
15 10 F
16 11 G
Ref: https://businessjargons.com/law-of-supply.html
Determinants of Market Demand
Definition: The Market Demand is defined as the sum of individual demands for a product per unit of
time, at a given price. Simply, the total quantity of a commodity demanded by all the buyers/individuals
at a given price, other things remaining same is called the market demand.
There are several factors that determine the demand for a product. These are:
1. Price of the Product: The price of a product is the most important determinant of market demand
in the long-run and the only determinant in the short-run. As per the law of demand, the price of
a product and its quantity demanded are inversely related, i.e. the quantity demanded increases
when the price falls and decreases when the price rises, other things remaining the same. Here,
other things imply that the income of the consumer, the price of the substitute and complementary
goods, tastes and preferences and the number of consumers, all remains constant. The price-
demand relationship has more significance in the oligopolistic market structure in which the result
of a price war among the firm and its rival decides the level of success of the firm.
2. Price of the Related Goods: The market demand for a commodity is also affected by the changes
in the price of the related goods.
The related goods may be the
substitute or complementary
goods. Two commodities are
said to be a substitute for one
another if they satisfy the
same want of an individual and
the change in the price of one
commodity affects the
demand for another in the
same direction. Such as, tea
and coffee, Maggi and Yippie,
Pepsi and Coca-Cola are close
substitutes for each other. The
increase in the price of either
commodity the demand for the
other also increases and vice-
versa. A commodity is said to
be a complement for another if
the use of two goods goes
together such that their
demand changes (increases
or decreases) simultaneously. For example, bread and butter, car and petrol, mattress and cot,
etc. are complementary goods. The increase in the price of either commodity the demand for
another decreases and vice-versa.
3. Consumer’s Income: The income is the basic determinant of the quantity demanded of a product
as it decides the purchasing power of the consumers. Thus, people with higher disposable
income spend a larger amount of income on consumer goods and services as compared to
those with lower disposable income. Consumer goods and services can be grouped under four
categories: essential goods, inferior goods, normal goods, and prestige or luxury goods. The
relationship between the consumer’s income and these goods is explained below:
• Essential Consumer Goods: The essential goods are the basic necessities of the life and are
consumed by all the persons of the society. Such as food grains, salt, cooking oil, clothing, housing,
etc., the demand for such commodities increases with the increase in consumer’s income but only
up to a certain limit, although the total expenditure may increase with respect to the quality of
goods consumed, other things remaining the same.
• Inferior Goods: A commodity is deemed to be inferior if its demand decreases with the
increases in the consumer’s income beyond a certain level of income and vice-versa. For
example, Bajra, millet, bidi are the inferior goods.
• Normal Goods: The normal goods are those goods whose demand increases with the
increase in the consumer’s income, such as clothing, household furniture, automobiles, etc. It is
to be noted that, demand for the normal goods increases rapidly with the increase in the
consumer’s income but slows down with a further increase in the income.
• Luxury Goods: The luxury goods are those goods which add to the prestige and pleasure of
the consumer without enhancing the earnings. For example, jewelry, stone, gem, luxury cars, etc.
The demand for such goods increases with the increase in the consumer’s income.
4. Consumers’ tastes and preferences: Consumer’s Tastes and preferences play a vital role in
determining a demand for a product. Tastes and preferences often depend on the lifestyle, culture,
social customs, hobbies, age and sex of the consumers and the religious sentiments attached to a
commodity. The change in any of these factors results in the change in the consumer’s tastes and
preferences, thereby resulting in either increase or decrease in the demand for a product.
5. Advertisement Expenditure: Advertisement is done to promote sales of a product. It helps in
stimulating demand for a product in four ways; by informing the prospective consumers about
the availability of a product, by showing its superiority over the competitor’s brand, by influencing
the consumer’s choice against the rival product and by setting new fashion and changing tastes of
the consumers. The effect of advertisement is said to be fruitful if it leads to the upward shift in the
demand curve, i.e. the demand increases with the increase in the advertisement expenditure, other
things remaining constant.
6. Consumers’ Expectations: In the short run, the consumer’s expectation with respect to the
income, future prices of the product and its supply position plays a vital role in determining
the demand for a commodity. If the consumer expects a high rise in the price of the commodity,
shall purchase it today at a high current price so as to avoid the pinch of the high price in the
future. On the contrary, if the prices are expected to fall in the future the consumer will postpone
their purchase with a view to avail benefits of lower prices in the future, especially in case of
nonessential goods. Likewise, an expected increase in the income increases the demand for a
product and vice-versa. Also, in the case of scarce goods, if its production is expected to fall short
in the future, the consumer will buy it at current higher prices.
7. Demonstration Effect: Often, the new commodities or new models of an existing product are
bought by the rich people. Some people buy goods due to their genuine need for them or have
excess purchasing power. While some others do so because they want to exhibit their affluence.
Once the commodity is in very much fashion, many households buy them not because they have a
genuine need for them but their neighbors have purchased it. Thus, the purchase made by such
people arises out of feelings as jealousy, equality in society, competition, social inferiority,
status consciousness. The purchases made on the account of these factors results in the
demonstration effect, also called as Bandwagon Effect.
8. Consumer-Credit Facility: The availability of credit to the consumer also determines the demand
for a product. The credit extended by sellers, banks, friends, relatives or from other sources induces
a consumer to buy more than what would have not been possible in the absence of the credit. Thus,
the consumers with more borrowing capacity consumes more than the ones who borrow
less.
9. Population of the Country: The population of the country also determines the total domestic
demand for a product of mass consumption. For a given level of per capita income, tastes and
preferences, price, income, etc., the larger the size of the population the larger the demand
for a product and vice-versa.
10.Distribution of National Income: The national income is one of the basic determinants of the
market demand for a product, such as the higher the national income, the higher the demand
for all the normal goods. Apart from its level, the distribution pattern of the national income
also determines the overall demand for a product. Such as, if the national income is unevenly
distributed, i.e., the majority of the population falls under the low-income groups, then the market
demand for the inferior goods will be more than the other category goods.
Thus, the demand for a commodity can be estimated or analyzed by studying the determinants of market
demand and the nature of the relationship between the demand and its determinants.
Ref: https://businessjargons.com/determinants-of-market-demand.html
Types of Demand
Definition: The Demand for a product refers to the quantity of goods and services that the consumers
are willing to buy at a particular price for a given point of time.
Types of Demand
The demand can be classified on the following basis:
1. Individual Demand and Market Demand: The individual demand refers to the demand for goods
and services by the single consumer, whereas the market demand is the demand for a product by
all the consumers who buy that product. Thus, the market demand is the aggregate of the
individual demand.
2. Total Market Demand and Market Segment
Demand: The total market demand refers to
the aggregate demand for a product by all the
consumers in the market who purchase a
specific kind of a product. Further, this
aggregate demand can be sub-divided into the
segments on the basis of geographical areas,
price sensitivity, customer size, age, sex, etc.
are called as the market segment demand.
3. Derived Demand and Direct Demand: When
the demand for a product/outcome is associated
with the demand for another product/outcome
is called as the derived demand or induced
demand. Such as the demand for cotton yarn is
derived from the demand for cotton cloth.
Whereas, when the demand for the products/
outcomes is independent of the demand for
another product/outcome is called as the direct
demand or autonomous demand. Such as, in
the above example the demand for a cotton
cloth is autonomous.
4. Industry Demand and Company Demand:
The industry demand refers to the total aggregate demand for the products of a particular industry,
such as demand for cement in the construction industry. While the company demand is a demand
for the product which is particular to the company and is a part of that industry. Such as demand
for tyres manufactured by the Goodyear. Thus, the company demand can be expressed as the
percentage of the industry demand.
5. Short-Run Demand and Long-Run Demand: The short term demand is more elastic which
means that the changes in price or income are reflected immediately on the quantity demanded.
Whereas, the long run demand is inelastic, which shows that demand for commodity exists as a
result of adjustments following changes in pricing, promotional strategies, consumption patterns,
etc.
6. Price Demand: The demand is often studied in parlance to price, and is therefore called as a price
demand. The price demand means the amount of commodity a person is willing to purchase at a
given price. While studying the demand, we often assume that the other factors such as income of
the consumer, their tastes, and preferences, the prices of other related goods remain unchanged.
There is a negative relationship between the price and demand Viz. As the price increases the
demand decreases and as the price decreases the demand increases.
7. Income Demand: The income demand refers to the willingness of an individual to buy a certain
quantity at a given income level. Here the price of the product, customer’s tastes and preferences
and the price of the related goods are expected to remain unchanged. There is a positive
relationship between the income and demand. As the income increases the demand for the
commodity also increases and vice-versa.
8. Cross Demand: It is one of the important types of demand wherein the demand for a commodity
depends not on its own price, but on the price of other related products is called as the cross
demand. Such as with the increase in the price of coffee the consumption of tea increases, since tea
and coffee are substitutes to each other. Also, when the price of cars increases the demand for
petrol decreases, as the car and petrol are complimentary to each other.
These are some of the important types of demand that the firms must cater to before deciding on the
price and other factors related to their products.
Ref: https://businessjargons.com/types-of-demand.html
Elasticity of Demand
Definition: The Elasticity of Demand is a measure of change in the quantity demanded in response to
the change in the price of the commodity. Simply, the effect of a change of price on the quantity
demanded is called as the elasticity of demand.
Marshall, a renowned economist, has suggested a mathematical method to measure the elasticity of
demand:
Where,
ΔQ = Q1 –Q0
ΔP = P1 – P0
Q1= New quantity
Q2= Original quantity
P1 = New price
P0 = Original price
Importance of Elasticity of Demand
• The concept of demand elasticity helps in understanding the price determination by the
monopolist. A monopoly is the market structure wherein there is only one seller whose main
objective is to maximize the profits. The price he chooses for his product depends on the elasticity
of demand. Such as, if the demand for a commodity is high he can choose the higher price as the
consumers will buy the product even when the price rise. But however, if the demand is elastic, he
will choose the lower prices.
• The determination of the price depends on demand for and supply of the commodity. But
however, the demand is governed by the demand elasticity and the supply too is governed by the
elasticity of supply. Therefore, the price of a commodity depends on both the demand and supply
elasticity.
• The concept of demand elasticity also helps in understanding other types of prices, such as
exchange rates, i.e. a rate at which currency unit of one country is exchanged for the currency unit
of another country. Also, the terms of trade, i.e. the rate at which the exports are changed for
imports can be easily understood through this concept.
• The concept of elasticity of demand also helps the government in its taxation policies. This helps
the government to have a fair idea about the demand elasticity of goods which are being taxed.
• This concept also helps in the determination of wages, such as if the demand for labor is inelastic
the union can demand higher wages and conversely if the labor demand is elastic the demand for
higher wages could not be raised.
Thus, the concept of elasticity of demand is very important to understand the economic problems and
policies. This is very well elucidated through the points explained above.
Ref: https://businessjargons.com/elasticity-of-demand.html
Types of Elasticity of Demand
Definition: The Elasticity of Demand
measures the percentage change in quantity
demanded for a percentage change in the
price. Simply, the relative change in demand
for a commodity as a result of a relative
change in its price is called as the elasticity of
demand.
1. Price Elasticity of Demand: The price elasticity of demand, commonly known as the
elasticity of demand refers to the
responsiveness and sensitiveness of
demand for a product to the changes
in its price. In other words, the price
elasticity of demand is equal to
Numerically,
Where,
P
Perfectly Inelastic Demand
For most of the goods, the income elasticity of demand is greater than one indicating that
with the change in income the demand will also change and that too in the same direction, i.e.
more income means more demand and vice-versa.
3. Cross Elasticity of Demand: The cross elasticity of demand refers to the change in quantity
demanded for one commodity as a result of
the change in the price of another
commodity. This type of elasticity usually
arises in the case of the interrelated goods
such as substitutes and complementary goods. The cross elasticity of demand for goods X and Y
can be expressed as:
The two commodities are said to be complementary, if the price of one commodity falls,
then the demand for other increases, on the contrary, if the price of one commodity rises the
demand for another commodity decreases. For example, petrol and car are complementary
goods. While the two commodities are said to be substitutes for each other if the price of one
commodity falls, the demand for another commodity also decreases, on the other hand, if the
price of one commodity rises the demand for the other commodity also increases. For example,
tea and coffee are substitute goods.
Numerically,
Where,
Q1 = Original Demand
These are some of the important types of elasticity of demand that helps in understanding the
criteria of demand for the goods and services and the factors that influence the demand.
Ref: https://businessjargons.com/types-of-elasticity-of-demand.html
In perfectly elastic demand the demand curve is a straight horizontal line which shows, the
flatter the demand curve the higher is the elasticity of demand.
4. Relatively Inelastic Demand (0-1): When the proportionate change in the demand for a product
is less than the proportionate change in the price, the demand is said to be relatively inelastic
demand. It is also called as the elasticity less than unity, i.e. 1. Here the demand curve is rapidly
sloping, which shows that the change in the quantity from OQ0 to OQ1 is relatively smaller than
the change in the price from OP1 to Op2.
5. Unitary Elastic Demand (Ep =1): The demand is unitary elastic when the proportionate change
in the price of a product results in the same change in the quantity demanded. Here the shape of
the demand curve is a rectangular hyperbola, which shows that area under the curve is equal to
one.
Thus, these are some of the types of the price elasticity of demand that helps the firms to price their
product in accordance with the demand patterns of an individual which changes with the change in the
price of the commodity.
Ref: https://businessjargons.com/types-of-price-elasticity-of-demand.html
Determinants of Elasticity of Demand
Definition: The Elasticity of Demand is a measure of sensitiveness of demand to the change in the
price of the commodity.
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