Demand and the determinants of demand | UGC NET Commerce Preparation Course PDF Download

Defining Demand

• Demand is essentially the desire of a consumer to purchase goods and services, coupled with their willingness to pay the specified price.
• In simple terms, demand represents the quantity of a particular product that consumers are ready to buy at different prices within a certain time frame.
• Demand is rooted in preferences and choices, influenced by factors like cost, potential benefits, profit, and other variables.
• The quantity of goods consumers decide to purchase largely depends on the product's price, the cost of other products, the consumer's income, and their personal preferences and tastes.
• The specific quantity of a product that a consumer is willing to buy, based on their financial ability and preferences, is referred to as the demand for that product.
• The demand curve is a graphical representation illustrating the relationship between the price of a product or service and the quantity demanded over a specific period.
• Typically, price is shown on the vertical axis, while the quantity demanded is plotted on the horizontal axis in the demand curve.

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Factors Influencing Demand

There are various factors that can impact demand significantly. Here, we will delve into the top five influencers:

Price of the Product:

• The demand for a product tends to shift with alterations in its price. Generally, if all other factors remain constant, the decision to purchase a product will stay consistent.

Consumer's Income:

• With a rise in income, the demand for goods typically increases as well. Conversely, a decrease in income usually results in a decrease in demand for goods.

Prices of Related Goods and Services:

• The prices of related goods and services play a significant role. For complementary products, an increase in the price of one can lead to a decrease in demand for its complement. For example, if the price of potatoes rises, the demand for potato chips may fall. Similarly, a price increase in one product can trigger an increase in demand for a substitute product. For instance, if the price of coffee goes up, the demand for tea may rise.

Consumer Expectations:

• Consumer expectations, such as high income expectations or anticipation of a price hike, can result in increased demand. Conversely, low income expectations or expectations of price decreases can lead to reduced demand for a product.

Number of Buyers:

• An increase or decrease in the number of buyers for a product will lead to a shift in demand.

Categories of Demand

• Price Demand: This type involves varying quantities of a product or service that a consumer is willing to purchase at a specific price, assuming other factors remain constant.
• Income Demand: Different quantities of a product or service that a consumer is willing to buy at various income levels, assuming other factors remain constant.
• Cross Demand: Indicates that the demand for a product is influenced not by its own price, but by the prices of related products.
• Direct Demand: Arises when a product or service directly fulfills a consumer's needs.
• Derived or Indirect Demand: Occurs when a product or service is essential for producing other goods that indirectly satisfy consumer needs.
• Joint Demand: Happens when multiple items are necessary to produce a product. For instance, in baking a cake, ingredients like flour, eggs, and sugar are jointly demanded.
• Composite Demand: This type of demand appears when a product or service serves multiple purposes. For example, electricity can be utilized for lighting, heating, and powering appliances.

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The Principle of Demand

• The principle of demand asserts that when the price of a product rises, the quantity demanded decreases, provided all other factors remain constant.
• Essentially, as a product's price goes up, consumers tend to buy less of it. This occurs because the opportunity cost for the consumer increases, prompting them to either choose a substitute product or avoid the purchase altogether.
• Exploring the principle of demand and its exceptions is fascinating.
• The theory of consumer preference sheds light on the combination of two products that a consumer is likely to purchase, considering the market prices of the products and the consumer's budget constraints.
• What makes this concept particularly interesting is the actual quantity of a product that a consumer decides to buy. In microeconomics, this is effectively explained through the demand function.