Concept of Demand
Demand refers to the quantity of a commodity or a service that people are willing to buy at a certain price during a certain time interval. It can be termed as a desire with the ‘willingness’ and ‘ability’ to pay for a commodity.
An increase in the price of the commodity decrease the demand for that commodity, while the decrease in price increases its demand. The phenomena is termed as law of demand.
Concept of Demand Function
Demand function is an algebraic expression that shows the functional relationship between the demand for a commodity and its various determinants affecting it. This includes income and price along with other determining factors.
Here, the demand for the commodity is the dependent variable, while its determinants are the independent variables.
Determinants of Demand
Price of the given commodity
Other things remaining constant, the rise in price of the commodity, the demand for the commodity contracts, and with the fall in price, its demand increases.
Price of related goods
Demand for the given commodity is affected by price of the related goods, which is called cross price demand.
Income of the individual consumer
Change in consumer’s level of income also influences their demand for different commodities. Normally, the demand for certain goods increase with the increasing level of income and vice versa.
Tastes and preferences
The taste and preferences of individuals also determine the demand made for certain goods and services. Factors such as climate, fashion, advertisement, innovation, etc. affect the taste and preference of the consumers.
Expectation of change in price in the future
If the price of the commodity is expected to rise in the future, the consumer will be willing to purchase more of the commodity at the existing price. However, if the future price is expected to fall, the demand for that commodity decreases at present.
Size and composition of population
The market demand for a commodity increases with the increase in the size and composition of the total population. For instance, with the increase in total population size, there is an increase in the number of buyers. Likewise, with an increase in the male composition of the population, the demand for goods meant for male increases.
Season and weather
The market demand for a certain commodity is also affected by the current weather conditions. For instance, the demand for cold beverages increase during summer season.
Distribution of income
In case of equal distribution of income in the economy, the market demand for a commodity remains less. With an increase in the unequal distribution of income, the demand for certain goods increase as most people will have the ability to buy certain goods and commodities, especially luxury goods.
Types of Demand Function
Based on whether the demand function is in relation to an individual consumer or to all consumers in the market, the demand function cab be categorized as
- Individual Demand Function
- Market Demand Function
Individual Demand Function
Individual demand function refers to the functional relationship between demand made by an individual consumer and the factors affecting the individual demand. It shows how demand made by an individual in the market is related to its determinants.
Mathematically, individual demand function can be expressed as,
Dx= f (Px, Pr, Y, T, F)
Where,
Dx= Demand for commodity x;
Px= Price of the given commodity x;
Pr= Price of related goods;
Y= Income of the individual consumer;
T= Tastes and preferences;
F= Expectation of change in price in the future.
Market Demand Function
Market demand function refers to the functional relationship between market demand and the factors affecting market demand. Market demand is affected by all the factors that affect an individual demand. In addition to this, it is also affected by size and composition of population, season and weather conditions, and distribution of income.
Mathematically, market demand function can be expressed as,
Dx= f (Px, Pr, Y, T, F, Po, S, D)
Where,
Dx= Demand for commodity x;
Px= Price of the given commodity x;
Pr= Price of related goods;
Y= Income of the individual consumer;
T= Tastes and preferences;
F= Expectation of change in price in the future;
Po= Size and composition of population;
S= Season and weather;
D= Distribution of income.