‘Demand’ is the very first and basic concept which we learn in the subject of Economics. Demand sums up as the ability and desire to purchase a good or service of the general public. Demand is a microeconomic variable which deals with the ‘what is likely to happen’ component of the economy. As per the chapter, demand is a very important concept for Commerce students. Basic knowledge about demand is necessary for everybody irrespective of any stream of study.
In this context, let us know what is demand and its various components which affect the demand.
What is Demand?
In economics, ‘demand’ stands for a consumer’s ability and desire to purchase a good or service. It is the principal force that drives the economic growth of a nation. Without it, other economic activities will become irrelevant.
Keeping other factors constant, an increase in prices of goods and services reduces consumer’s demand and vice-versa. Business spends considerable time and money to understand this demand definition correctly.
An incorrect projection may either leave them with revenue shortage if they underestimate market demand or losses if they overestimate it. Demand is what fuels an economy and in its absence businesses will stop production, and other wheels of an economy will stop rolling.
Demand meaning is closely associated with supply. While customers want to pay the lowest possible price for goods and services, suppliers try to make as much profit as they can. In case a company asks for a higher price for its product, then its demand in terms of volume goes down, and it results in lower sales and profits.
Conversely, if a company charges very little for a product, then its demand in terms of volume will increase, but lower prices mean that such an organization will not generate enough revenue to cover its costs and make a profit. Apart from this, other factors that affect demand are the appeal of a good or service, it is uninterrupted supply, availability of competitive products, an option of financing and its perceived availability.
Types of Demand
Demand is primarily classified based on several factors like the nature of a product, its usage, number of consumers and suppliers, etc. Therefore, the need for products will vary depending on the situation. These are –
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Individual Demand and Market Demand
Individual demand refers to the need for a product by a single consumer. It can be regarded as the quantity of a product required by a consumer at a particular price point within a specific period. For example, Mr A has a demand of 200 units per week for a specific product which is valued at Rs.40. Individual demand is subject to the price of a product, income of individuals and their preferences.
The cumulative demand of a product by every individual at a fixed price and time is considered as market demand. In other words, it is the aggregate of individual needs for a specific product at a set price, when other factors remain constant. For instance, there are five consumers of mustard oil and their consumption in a month is 10, 20, 30, 40, and 50 litres, respectively. Therefore, the market demand for this mustard oil is 150 litres.
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Organisation and Industry Demand
The need for a product produced by a specific organisation at a set price within a period is known as organisation demand. For example, the want for Maruti Suzuki cars can be classified as organisation demand.
On the other hand, the total demand for products from every organisation of a particular industry is regarded as industry demand. For instance, the aggregate demands of passenger cars from manufacturers like Maruti Suzuki, Toyota, Hyundai, Tata Motors, Mahindra and Mahindra, etc. are considered as industry demand.
However, the distinction between these two is not visible in a highly competitive market. It is since, in a market like this, no organisation has a significant market share. Therefore, the demand for a company’s product has no importance.
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Income Demand
It refers to the eagerness of an individual to purchase a definite quantity at a particular level of income.
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Autonomous and Derived Demand
It refers to the categorising of demand based on the dependency on other products. If the demand for commodities is not dependable on others, then it is labelled as a direct or autonomous demand. It mainly arises due to a person’s natural need for consuming that product. For example, the demand for agricultural products rises to fulfil the requirement of hunger.
On the other hand, derived demand refers to the requirement of a product that increases when the need for associated products also rises. For instance, the need for petrol and diesel depends on the demand for cars. Additionally, the demand for raw materials is also classified under this as it depends on the production of other goods. Apart from this, the demand for complementary and substitute products are also classified under this.
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Price Demand
Price demand talks about the quantity of a good or service an individual can purchase at a given price point.
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Demand for Perishable and Durable Goods
It refers to the demand for goods based on their usage. Goods are primarily divided into two categories – perishable and durable. Perishable goods are the ones that have a single-use like coal, petrol, food products, etc. Contrarily, durable goods are the ones that can be used repeatedly like clothes, shoes, machinery, car, etc. Durable goods can satisfy any present and future demand, unlike perishable products.
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Cross Demand
Cross demand refers to the need for products, which is not based on their price but instead on the price of other similar products. For example, if the price of coffee increases, then the demand for tea will increase as individuals will switch to a cheaper alternative.
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Seasonal and Long-term Demand
It refers to the demand for products based on time. Seasonal need means the demand for products that are used for a short and specific time like umbrellas or raincoats. These products are used mainly in the monsoon season. Therefore, they are primarily sold before or during the monsoon. On the other hand, long-term demand classifies demand for products over a more extended period. Typically, durable goods are regarded here, but it depends on some other factors such as change of technology, availability of substitutes, etc. Organisations consider these two factors before designing a new product.
Factors affecting Demand
There are several factors affecting demand, and the following list indicates the major factors –
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Tastes and Preferences of The Consumers: With time, the tastes and preferences of customers change and that can affect the demand for a particular product.
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Income: It is one of the significant factors that can affect the demand both positively and negatively. Income changes the preferences of individuals, and therefore, affects the need.
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Change of Price: The demand for a product depends on its price. If it increases, then its demand goes down and vice-versa.
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Promotion: Marketing and promotion are vital to the demand factor. It can change the demand for a product. If a company can market their product well and influence people, then it may swing the market share in its favour.
Demand Schedule
Demand schedule definition is that it represents a table that portrays the quantity demand of a product at various price points. It consists of two columns, the first one lists the price and the second one displays the aggregate demand. Below is a format of the demand schedule for reference.
Demand Curve
Demand curve definition is that it is a graphical presentation of the relationship between a product’s price and its demand in a specific period. Typically, the price of a product appears on the vertical axis and the demand on the horizontal axis.
Demand factor or demand definition is a vital and fundamental concept in Economics and forms the foundation for assimilation of further topics. Students who want to read more such chapters of economics and commerce can visit the official website of .