DEMAND ANALYSIS , LAW OF DEMAND

 DEMAND  ANALYSIS 

INTRODUCTION: 

Demand in common parlance means the desire for an object This means that the demand becomes effective only it if is backed by the purchasing power in addition to this there must be willingness to buy a commodity. Thus demand has three essentials – price, quantity demanded and time. 

DEMAND DEFINITION: 

“Demand means the various quantities of goods that would be purchased at a particular price and not merely the desire of a thing.” 

LAW OF DEMAND: 

Law of demand shows the relation between price and quantity demanded of a commodity in the market. In the words of Marshall, “the amount demand increases with a fall in price and diminishes with a rise in price”. 

The law of demand may be explained with the help of the following demand schedule. 

Demand Schedule. 

 

Price of Apple (In Rs.)	Quantity Demanded
50	1
40	2
30	3
20	4
10	5

When the price falls from Rs. 50 to 40 quantity demand increases from 1 to 2. In the same way as price falls, quantity demand increases on the basis of the demand schedule we can draw the demand curve. 

The demand curve DD shows the inverse relation between price and quantity demand of apple. It is downward sloping. 

Assumptions: 

Law is demand is based on certain assumptions 

1. This is no change in consumers taste and preferences. 

2. Income should remain constant. 

3. There should be no substitute for the commodity 

4. The commodity should not confer at any distinction 

5. The demand for the commodity should be continuous 6. People should not expect any change in the price of the commodity 

EXCEPTIONS TO THE LAW OF DEMAND: 

1. Giffen paradox: 

The Giffen good or inferior good is an exception to the law of demand. When the price of an inferior good falls, the poor will buy less and vice versa. For example, when the price of maize falls, the poor are willing to spend more on superior goods than on maize if the price of maize increases, he has to increase the quantity of money spent on it. 

2. Veblen or Demonstration effect: 

‘Veblan’ has explained the exceptional demand curve through his doctrine of conspicuous consumption. Rich people buy certain good because it gives social distinction or prestige for example diamonds are bought by the richer class for the prestige 

3. Ignorance: 

Sometimes, the quality of the commodity is Judge by its price. Consumers think that the product is superior if the price is high. As such they buy more at a higher price. 

4.Speculative effect: 

If the price of the commodity is increasing the consumers will buy more of it because of the fear that it increase still further, Thus, an increase in price may not be accomplished by a decrease in demand. 

5. Fear of shortage: 

During the times of emergency of war People may expect shortage of a commodity. At that time, they may buy more at a higher price to keep stocks for the future. 6.Necessaries: In the case of necessaries like rice, vegetables etc. people buy more even at a higher price. 

FACTORS EFFECTING THE DEMAND: 

1. Price of the Commodity: 

The relation between price and demand is called the Law of Demand. It is not only the existing price but also the expected changes in price, which affect demand. 

2. Income of the Consumer: 

The second most important factor influencing demand is consumer income. IThe demand for a normal commodity goes up when income rises and falls down when income falls. But in case of Giffen goods the relationship is the opposite. 

3. Prices of related goods: 

The demand for a commodity is also affected by the changes in prices of the related goods also. Related goods can be of two types: 

(i) Substitutes which can replace each other in use; for example, tea and coffee are substitutes. The change in price of a substitute has effect on a commodity’s demand in the same direction in which price changes. The rise in price of coffee shall raise the demand for tea; 

(ii) Complementary goods are those which are jointly demanded, such as pen and ink. If the price of pens goes up, their demand is less as a result of which the demand for ink is also less. The price and demand go in opposite direction. The effect of changes in price of a commodity on amounts demanded of related commodities is called Cross Demand. 

4. Tastes of the Consumers: 

The amount demanded also depends on consumer’s taste. Tastes include fashion, habit, customs, etc. A consumer’s taste is also affected by advertisement. If the taste for a commodity goes up, its amount demanded is more even at the same price. This is called increase in demand. The opposite is called decrease in demand. 

5. Population: 

Increase in population increases demand for necessaries of life. A change in composition of population has an effect on the nature of demand for different commodities. 

6. Government Policy: 

Government policy affects the demands for commodities through taxation. Taxing a commodity increases its price and the demand goes down. Similarly, financial help from the government increases the demand for a commodity while lowering its price. 

7. Expectations Price in the future: 

If consumers expect changes in price of commodity in future, they will change the demand at present even when the present price remains the same. Similarly, if consumers expect their incomes to rise in the near future they may increase the demand for a commodity just now. 

8. Climate and weather: 

The climate of an area and the weather prevailing there has a decisive effect on consumer’s demand. In cold areas woolen cloth is demanded. During hot summer days, ice is very much in demand. On a rainy day, ice cream is not so much demanded.