DEMAND ANALYSIS

DEMAND ANALYSIS

Demand for a commodity

Demand for a commodity refers to that quantity of a commodity demanded in the market at a given price in a given period.

Constituents of Demand

Demand in Economics implies both desire to purchase and ability to pay. Mere desire does not constitute demand unless it is backed by ability to pay.

Quantity Demanded = Need + Availability + Desire + Ability to Pay (Purchasing Power)

Household demand or Individual Demand

The basic unit of consumption in an economy is the individual household. The demand for a commodity of the individual household is the quantity of that commodity that he is ready to purchase or take away from the market in a given moment of time at a given price.

Factors affecting household demand

They are many factors affecting household demand:

1. Price of the commodity: The demand of a commodity is inversely and negatively related to its price

2. The price of the related goods: The demand of a particular is related with the change in price of the other commodity (substitute and complementary goods).

3. Income of the consumer: There is direct relationship between income of the consumer and quantity demanded.

4. Taste, preference, habit of the consumer



Demand Function

Demand Function shows the functional relationship between demand for a commodity and its various determinants.

Qd = f (P, Pr, Y, T & W)
Where P is the price of the commodity, Pr is the price of related commodities, Y is the income of the consumer, T is Taste, preference, and habit of the consumer, W is Climate, fashion, population, etc.

Kinds of Demand

Price Demand Other things being the same, Price demand shows the functional relationship between price of the commodity and quantity of commodity demanded. It can be expressed as QD= f (P)

Income demand
Other things being the same, income demand shows the functional relationship between quantity of commodity demanded and income of the consumer who purchase it. It can be expressed as QD= f (y)

Cross demand.
Other things being the same cross demand shows the functional relationship between quantities of a commodity demanded and price of its related commodity. It can be expressed as QD= f (Pr)

Household Demand schedule

A Household demand schedule is a tabular statement that shows a full account of household demand of a particular commodity at different prices at certain time.

Household demand curve

Graphical representation of household demand schedule is called Household Demand Curve. In other words, the curve shows the various quantities of demand for a commodity by a particular household at various levels of price

Market Demand Schedule And Market Demand Curve

The summation of all individual demand schedules in a market for a commodity is called Market Demand Curve. A curve that shows the demand of the whole market for a commodity at its various prices is known as market demand curve. Market demand curve is the horizontal summation of all individual household demand curves 

 Law of demand

Law of demand establishes the relationship between price and quantity of goods demanded. According to this Law, “other things being the same, when the price of the commodity increases the quantity demanded falls and when the price of the commodity falls, the quantity demanded increases”. It means that the price and quantity demanded move in the opposite direction. That is Price and Quantity demanded is negatively / indirectly related.

Assumptions of Law of demand

1. There is no change in the price of related commodities

 . There is no change in the income of the consumer.

 3. There is no change in the Taste, preference, and habit of the consumer.

4. There is no change in the climate, fashion, etc.

5. There is no change in the population.

6. There is no change distribution of income and wealth

7. There is no change climate and seasons

8. There is no change government policy

Exceptions to the Law of demand

The following does not obey the law of demand: - 

1. Giffen goods. (a special category of inferior goods)
2. Conspicuous goods.( Conspicuous consumption is the practice of purchasing goods or services to publicly display wealth rather than to cover basic needs.)

3. Expectation of future change in price of the commodity.
4. Necessities.
5. Ignorance of the Consumer.
6. Extra ordinary situation.
7. Change in fashion, habit, attitude etc.

Reason for Law of Demand

1.Income Effect : The effect on demand for a commodity due to change in real income of the consumer as a result of change in its price commodity is known as Income Effect

2. Substitution Effect: the consumer starts to substitute this commodity in the place of other commodity when price of one commodity increases. 

The combined effect of income and substitution effect is called Price Effect