Chapter 3 - Theory of Demand
What is demand?
Demand refers to various quantities that a consumer is ready to buy at different possible prices of a commodity.
What do you mean by Quantity demanded?
Quantity demanded refers to a specific quantity to be purchased against a specific price of the commodity.
What is a Demand curve?
Demand curve represents the maximum quantities per unit of time that consumer will take at various prices.
What you mean by demand function?
Or
What are the determinants/factors/functions of demand?
Demand function shows the relationship between demand for a commodity and its various determinants.
We have two types of demand functions:
a) 1.1) Individual demand function
b) 1.2) Market demand function
1.1) Individual demand function
1)
i) Price of a commodity: - There is an inverse relation between demand price of a commodity. When the price raises the demand of the commodity decreases whereas when the price decreases the demand of that commodity increases.
2)
ii) Price of related goods:- These are of two types :-
(i) a) Substitute goods: - These are those goods whose substitute are available e.g. tea and coffee, ball-pen and ink-pen. If the price of the commodity increases (say tea) then demand of its substitute will increase (coffee) and if the demand of the commodity decreases then demand of its substitute will also decrease. There is a positive effect in substitute goods.
(ii) b) Complementary good: - These are those goods which are dependent on each other, e.g. pen and ink, car and petrol. If the price of the commodity will increase (say car) then the demand of the complementary good will decrease (petrol). There is inverse relation in complementary goods
3) iii) Income of the consumer:- If the income of the consumer will raise then the demand of normal goods will increase and inferior goods will decrease but the income of the consumer will decrease then the demand of the inferior goods will increase and normal goods will decrease.( There is positive relation between demand and income in case of normal goods but inverse relations in case of inferior goods)
4)
iv) Taste and preferences: - Taste and preferences are influenced by fashion, custom etc. If the taste and preferences are in favour of consumer then demand of the commodity will increases, if the taste and preferences are not in favour then demand will decrease.
5)
v)Expectations: - If the near future the prices of the commodity are supposed to raise then demand will increase but if the price is supposed to decrease in the near future then the demand of the commodity will decrease.
1.2) MARKET DEMAND FUNCTION:-
POPULATION SIZE: - Demand increases with the increase of the population and vice- versa this is because more population means more demand of goods and less population means less demand.
DISTRIBUTION OF INCOME:- If the income will be equally distributed then there will be more demand but if the income will be unequally distributed then demand will be less.
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