Demand and its types

Demand

In economics, the term "Demand" is different from desire, want, and wish.

For demand three conditions are necessary:

1 Desire to purchase

2 Ability to pay

3 Willingness to pay

Demand refers to a total or given quantity of a particular good or service that consumers are willing and able to purchase during a specified period at a particular price.

Characteristics of Demand

• Demand is always at a price.
• It is related to time.
• It should always be expressed in terms of a specific quantity.
• A consumer must have the necessary purchasing-power to fulfill his desire for the commodity.
• Consumers must always be ready to exchange their money for the commodity.

Demand basically depends on the utility of a product. There is a direct relation between them. If a consumer gets higher utility from a good, then demand will be higher or vice-versa.

Demand Function

The demand function is a comprehensive expression that specifies the factors that influence the demand for a product.

Dx =f (Px, Pr, Y, T, U, etc...)

Dx = Demand for good X.

Px = Price of good X.

Pr = Price of related goods (complementary & substitutes).

Y = Income of consumer.

T = Taste and preference.

U = All other determinants such as advertisements, fashion, expected future price, expected income in the future, and the number of buyers in the market, population, etc.

Thus, 'Demand function' is a relation between the demand of the commodity and the factors determining demand.

Types of Demand

Demand is generally classified on the basis of the consumers of a product, suppliers of the product, nature of goods, duration of consumption of a commodity. 

The different types of demand are as follows:

Individual and Market Demand:

Individual demand is the demand for a product at a certain price by one consumer during a specific time period. It is effected by his money income, taste and preferences and price of the other commodity (particularly substitutes and complements)

Market demand is the aggregate of individual demands of all the consumers of a product during a specific period of time at a particular price, while other factors remain constant.

Firm and industry demand: The demand for products at a certain price over a period of time from a single organization is known as Firm demand. The sum total of demand for products of all organizations in a particular industry is known as Industry demand.

For example, cars are manufactured in India by many companies like Maruti, Tata Motors, Hyundai, etc. The demand for Tata Motors is firm demand while the demand for all kinds of cars is industry demand.

Short-term and long-term demand:

Short-term demand refers to the demand for products that are used for a shorter duration of time. This demand depends on the current price changes, income fluctuations, tastes, and preferences of consumers. Fashion consumer goods, goods of seasonal use are the example of short term demand. Long-term demand refers to the demand for products over a longer period of time. Durable goods are an example of long-term demand. Long-term demand depends on the long- term income trends, availability of better substitutes, sales promotion, and advertising by a company, etc. Short term and long term concepts of demand are useful in designing products for producers, in pricing policy, and determining and phasing the advertisement expenditure.

Autonomous and Derived demand: Autonomous demand, also known as direct demand for a commodity is one that arises on its own out of a natural desire to consume or possesses a commodity. 

An Autonomous demand for a product is one that arises independently of the demand for any other good

 It is independent of the demand for any other commodity. Demand for food, clothes, shelters are examples of autonomous demand.

Derived demand is an economic demand that arises because of the demand for some other commodity, called 'parent product'. Demand for steel, bricks, cement, etc. is a derived demand, derived from the demand of the house and other kinds of buildings.

Perishable and durable goods demand: Perishable or non-durable goods refer to the goods that have a single-use. Non-durable consumer goods as all food items, drinks, and non-durable producer goods include raw materials, fuel, and power, packing items, come in this category.

On the other hand, durable goods refer to goods that can be used repeatedly or continuously over a period of time. Durable consumer goods include clothes, shoes, houses, furniture, etc. The durable producer goods include building, plant, machinery, etc.

While both types of goods satisfy the demands of consumers, durable items have more perceived value over the long-term. In addition, durable goods also need replacement over time (cars, shoes, clothing), so a market demand still exists for them after an initial purchase.

Importance of Demand Analysis

The analysis of demand theory is very much important in the business decision. The importance of demand analysis is below:

Pricing Policy:

It helps firms design their pricing policy. Producers can’t fix prices for their products without understanding the market demand for them. If the demand for the product is high, the firm can charge a high price, other things remain the same. The firm cannot charge a high price if the demand for the product is low.

Sales Forecasting:

Sales forecasting can be made on the basis of demand as it is the basis of the sales of the product of a firm. If demand is high, sales will be high or vice versa.

Marketing Decisions:

The analysis of demand helps a firm to formulate marketing decisions. Demand analysis helps firms in investment decisions, based on the operable response of consumers towards a particular good.

Production Decisions:

It is the capacity of how much the firm can produce depends on its demand. If the demand is expected to be high in the future, the firm should increase production. If the demand is less, the new demand should be created by doing promotional activities.

Financial Decisions:

If the demand for a firm’s product is strong and high, the need for additional finance will be greater. Hence, businessmen should make necessary arrangements to finance the rising need of the capital.

Kinds of demand

There are three kinds of demand:

Price demand: Price demand refers to the various quantities of a good or service that a consumer would purchase at a given time in a market at various hypothetical prices, other things remain unchanged.

The demand of the individual consumer is called individual demand and the total demand of all the consumers combined for the goods or service is called Industry demand.

Income demand: The income demand refers to the various quantities of goods and services which would be purchased by the consumers at various levels of incomes, other things, such as the price of the good or service as well as the price of the inter-related goods and the tastes and preferences of the consumers, remain unchanged.

Cross demand: The cross demand refers to the quantity of a good or service which will be purchased with reference to change in price, not of this good but of the inter-related goods such as substitutes or complementary good.

Dr. Swati Gupta

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