Definition of Demand

The demand for a product refers to the

amount of it which will be bought per unit
of time at a particular price

Demand = Desire + Ability to pay (i.e.,

Money or Purchasing Power) + Will to
spend
 The Concept of Demand. . .
Quantity Demanded P
refers to the amount
Unwilling to
(quantity) of a good
buy
that buyers are
willing to purchase at
alternative prices for
Willing
a given period. to buy

Q
 Types of Demand
1. Demand for consumers’ goods and
producers’ goods
2. Demand for perishable and durable goods
3. Autonomous (direct) and derived
(indirect) demand.
4. Individual buyer’s demand and all
buyers’ (aggregate / market) demand.
5. Firm and Industry demand
6. Demand by market segments and by total
market
 Consumers’ Goods and Producers’ Goods
Goods and Services used for final
consumption are called consumers’
goods.
These include those consumed by
human-beings (e.g. food items, clothes,
kitchen tools, residential houses,
medicines, and services of teachers,
doctors, lawyers, washer men and shoe-
makers), animals (e.g. dog food and fish
food), birds (e.g. grains), etc.
Producers’ goods refer to the goods used for
production of other goods.
Thus, producers’ goods consist of plant and
machines, factory buildings, services of
business employees, raw-materials, etc.
The distinction is somewhat arbitrary. This is
because, whether a good is consumers’ or
producers’ depends on its use.
For ex., if a sofa set is used in the drawing
room of a house - it is a consumers’ good;
while if is a used in the reception room of a
business house – it is a producers’ good.
But,the distinction is useful for a proper
demand analysis for while the demand for
consumers’ goods depends on
households’ income, that for producers’
goods varies with the production level,
among other things.
 Perishable and durable goods
Both consumers’ and producers’ goods
are further classified into perishable (non-
durable) and durable goods.
In laymen’s language, perishable goods
are those which perish or become
unusable after sometime, the rest are
durable goods.
In economics, perishable goods refer to
those goods which can be consumed only
once while in case of durable goods, their
services only are consumed.
Perishable goods include all services (e.g.
services of teachers and doctors), food
items, raw-materials, coal, and electricity,
while durable goods include plant and
machinery, buildings, furniture,
automobiles, refrigerators, and fans.
Durable goods pose more complicated
problems for demand analysis than do non-
durables.
Sales of non-durables are made largely to
meet current demands which depends on
current conditions.
In contrast, sales of durable goods go
partly to satisfy new demand and partly to
replace old items.
Further, the letter set of goods are
generally more expensive than the former
set, and their demand alone is subject to
preponment and postponement, depending
on current market conditions vis-à-vis
expected market conditions in future.
 Autonomous (direct) and
Derived (Indirect) Demand
The goods whose demand is not tied with
the demand for some other goods are said to
have autonomous demand, while the rest
have derived demand.
Thus, the demands for all producers’ goods
are derived demands, for they are needed in
order to obtain consumers or producers
goods.
Thus, the demand for goods which fulfill
our basic Physiological requirements, are
generally included in autonomous demand.
For example; Demand for soap, clothing
etc
While the demand for goods for the
production of other goods and services are
included in derived.
For example; Demand for raw material
like steel, cement, plant and machinery etc,
Demand for money which is needed not
for its own sake but for its purchasing
power, which can buy goods and services.
Similarly, demand for car’s battery or
petrol is a derived demand, for it is linked
to the demand for a car.
There is hardly anything whose demand is
totally independent of any other demand.
But the degree of this dependence varies
widely from product to product.
For ex: Demand for petrol is totally linked
to the demand for petrol driven vehicles,
while the demand for sugar is only loosely
linked with the demand for milk.
Goods that are demanded for their own
sake have direct demand while goods that
are needed in order to obtain some other
goods possess indirect demand.
In this sense, all consumers’ goods have
direct demands while all producers’ goods,
including money, have indirect demand.
Individual’s Demand and Market
Demand
The demand for a goods by an individual
buyer is called individual’s demand while
the demand for a goods by all buyers in a
market is called market demand.
For ex, if the ice-cream cones market
consisted of, say, only two buyers, then
individuals and market demand (daily)
could be as follows.
 Individual firm Demand
Amul’s Demand: Ice Cream Cones
Price/cones Daily
quantity
_________________________________
Rs10.00 12
Rs15.00 10
Rs20.00 8
Rs25.00 6
Rs30.00 4
 Industry Demand
Market demand is the sum of all individual
demands at each possible price.
Assume the ice cream market has two
buyers as follows:
Price Per Cone Amul Vadilal Market
Demand
 Rs10.00 12 + 7 = 19
 Rs15.00 10 + 6 = 16
 Rs20.00 8 + 5 = 13
 Rs25.00 6 + 4 = 10
 Rs30.00 4 + 3 = 7
 Market Demand Curve
All Buyers
P
Rs Per
Cone
Rs30.00
Rs25.00
Rs20.00

7 10 13 Q # Cones Per Day

 Firm and Industry Demand
Most goods today are produced by more
than one firm and so there is a difference
between the demand facing an individual
firm and that facing an industry (all firms
producing a particular good constitute an
industry engaged in the production of that
good).
For ex: Cars in India are manufactured by
Maruti Udyog, Hindustan Motors, Premier
Automobiles, and Standard Motor
Products of India.
Demand for Maruti car alone is a firm’s
(company) demand where as demand for all
kinds of cars is industry’s demand.

Similarly, demand for Godrej refrigerators

is a firm’s demand while that for all brands
of refrigerators is the industry’s demand.
Demand by Market Segments and by
Total Market

The market demand is the total demand

for the product in the market. It is the sum
(total) of the demand of a product by all
the consumers in the market. In
managerial economic the total market
demand concept is having very less
importance.
On the other hand demand by segment is
the entire market is divided into different
groups on the basic of location,
demography, life style and behavior of the
consumers in the classification is more
meaningful in managerial economics.
The demand condition in each segment is
different from other, which provides
better guidance for the manager in
understanding the different class of
consumers.
 Demand Function
A function is that which describes the
relationship between a variable (dependent
variable) and its determinants
(independent variables).
Thus, the demand function for a good
relates the quantities of a goods which
consumers demand during some specific
period to the factors which influence that
demand.
Mathematically, the demand function for a
goods x can be expressed as follows:
 Demand function
Dx= f (Y, Px, Ps, Pc, T; Ep, Ey, N, D, u)

 Dx =Demand of goods x
 Y =Income of consumers
 Px =Price of x
 Ps =Price of substitute of x
 Pc =Price of complements of x
 T =Taste of consumers
 Ep =Consumers’ expectations about future price
 Ey = Consumers’ expectations about future income
 N =No. of consumers
 D =Distribution of consumers
The first five determinants affect the
demand for all goods, the next two are
influence mainly on the demand for
durable and expensive goods, and the next
tow are arguments only in the demand
functions for a group of consumers.
The impact of these determinants on
Demand is
1) Price effect on demand: Demand for x
is inversely related to its own price.
2) Substitution effect on demand: If y is a
substitute of x, then as price of y
increases, demand for x also increases.
3) Complementary effect on demand: If z
is a complement of x, then as the price of
z falls, the demand for z goes up and thus
the demand for x also tends to rise.
4)Price expectation effect on demand:
Here the relation may not be definite as
the psychology of the consumer comes
into play.
5) Income effect on demand: As income
rises, consumers buy more of normal
goods (positive effect) and less of inferior
goods (negative effect).
6) Promotional effect on demand:
Advertisement increases the sale of a firm
up to a point.

Socio-psychological determinants of
demand like tastes and preferences,
custom, habits, etc.
 Demand Curve
Demand curve considers only the price
demand relation, other factors remaining
the same.
An individual’s demand schedule for
commodity x
Price x (per unit) Quantity of x
demanded (in units)
2.0 1.0
1.5 2.0
1.0 3.0
0.5 4.5
The demand curve is negatively sloped,
indicating that the individual purchases
more of the commodity per time period at
lower prices.
The inverse relationship between the
price of the commodity and the quantity
demanded per time period is referred to as
the law of demand.
A fall in Px leads to an increase in Dx
because of the substitution effect and
income effect.
 Determinants of Demand

Product’s Own Price

Consumer Income
Prices of Related Goods
Tastes & preferences
Expectations about future price & income
Number of Consumers & their
Distribution
 Demand Determinants

For all demands For durable and/or For aggregate demand

expensive goods
Own price Consumer’s No. of Distribution
taste & Consumers of
Consumer’s preference consumers
Income

Prices of related goods

Substitute Complementary
goods prices goods’ prices

Consumers’ expectations about

Future Future
Incomes Prices
Consumers’ Income and Demand
Income acts as a variable to take care of
the ability to pay requirement in the
demand function.
Economists classify goods into normal or
superior goods and inferior goods.
By defination, the former are those whose
demand varies directly with income while
the latter are those whose demand varies
inversely with income.
For example : milk, refrigerator, television,
education, and the good quality of
 Food grains and clothes are superior
goods while the poor quality of food
grains and clothes are inferior goods.
The relationship between demand and
income is of this type because as the
consumer’s income increases, his
purchasing power goes up and therefore
he increases his consumption of superior
goods, and if he was consuming some
inferior items earlier, he would give them
up either totally or partially in favor of
superior items.
Engel was the first person to study this
relationship systematically and the curve
reflecting the relationship between
demand and income, is known as the
Engel’s curve.
The curvature of the Engel curve depends
on the degree of the superiority or
inferiority of the good in question. Thus,
the curve be linear (straight line), convex
or even concave.
 Engel Schedules
For Superior Goods For Inferior Goods
Income Demand Income Demand

100 5 100 10
150 8 150 9
200 10 200 7
250 11 250 4

Income

Demand
 Own Price and Demand
The demand for a goods varies inversely
with its own price
Thus, as the price of the Maruti car goes
up, the demand for Maruti car goes down.
This is known as Law of Demand.
The Law which describe the inverse
relationship between quantity demanded
and price.
The price effect (PE) is divided into
income effect(IE) and substitution
effect(SE). i.e. PE = IE + SE.
 Prices of Related Goods and Demand
Consumers’ goods may have either of the
two kinds of relationships: Substitutes and
complements.
For ex: tea and coffee , car and scooters
are substitutes goods.
The degree of substitution might vary
from product to product.
For ex: Maruti car and Honda car is a
close substitution while car and scooter is
a poor substitution.
Thus, increase in the price of a substitute
good would lead to an increase in the
demand for the good.
When the price of complementary goods
goes down, the demand for its parent
good goes up.
Ex : Car and Petrol
Petrol is complementary good
Consumers’ Testes and Preferences,
and Demand
Consumers’ testes and preferences are an
important determinant of the demands for
all consumers’ good.
If a product goes out of fashion, or taste,
its demand goes down. On the other hand,
if an item becomes popular its demand
goes up.
Producers’ spend a lot of money on
advertising their products primarily
Because they can influence the tastes and
preferences of the consumers in their
favour, and thereby achieve an increase in
the demand for their own products.
Consumers’ expectations and
demand
The expectations’ variable plays a more
significant role in the case of demand for
durable and expensive items.
Generally, expectations’ variables are
often left out from the list of demand
determinants for non-durable and cheap
goods.
Number of Consumers, their
distribution and demand
The aggregate demand for a good
obviously depends also on the number of
consumers.
The larger the number of consumers, the
greater is the demand, and vice versa.