Demand Analysis

Concept of Demand, Types and Demand Determinants

Objective
After going through this chapter, you shall be able to understand the following concepts

• Concept of Demand
• Individual and Market Demand
• Individual and Market Demand Function
• Individual and Market Demand Curve
• Determinants of Individual and Market Demands
• Types of Demand

Introduction

This chapter basically focuses on the concept of consumer demand. We all demand (need) various goods and services for the satisfaction of our wants. In this chapter, we will explore the various aspects related to demand such as what factors affect our demand for commodities and types of demand.

Concept of Demand

Demand for a commodity refers to the quantity of the commodity which a consumer is willing and is able to purchase at a particular price for a given period of time'.

In the definition given above, the two terms ‘willing’ and ‘able to purchase’ are worth noting. In economics, mere willingness to purchase a commodity does not constitute demand. Rather, this willingness must be backed by the ability to purchase the commodity (in terms of availability of money) for it to be regarded as demand.
In this regard, we can distinguish between two similar terms, desire and demand. While the desire for a commodity indicates mere willingness to purchase a commodity without sufficient purchasing power, demand for a commodity refers to the willingness to purchase which is further backed by the ability to purchase. To put in other words, it is only when a desire is backed by the sufficient purchasing power than such a desire becomes a demand. The following note further clarify this concept.


Individual and Market Demand

Individual demand is the demand of a particular consumer. It represents various quantities of a particular commodity that a consumer (single buyer) is willing to purchase at different possible prices at a particular point in time. On the other hand, Market demand is the aggregate (total) of the individual demands for a product by all consumers in the market at different prices.

Demand Schedule 

Demand Schedule is a tabular presentation of the relationship between the price of a commodity and the quantity demanded of that commodity at a particular point of time. In other words, it shows the different quantities of a commodity that a consumer is willing to purchase at different possible prices. The demand schedule can be sub-divided into the following two types.

1. Individual demand schedule

2. Market demand schedule

Individual Demand Schedule
An individual demand schedule is prepared for a particular consumer. It presents the various quantities of a particular commodity that a consumer is willing to purchase at different possible prices, at a particular point of time. 
Example: Consider the following demand schedule for a commodity X 

Price of Commodity X (in Rs)	Quantity Demanded of X (units)
10	100
15	50
20	25
25	15
30	5

A close analysis of the above schedule reveals that quantity demanded of a commodity holds a negative relationship with the price. In other words, it shows that at a higher price the quantity demanded of X falls and vice-versa. For example, as the price increases from Rs 10 to Rs 15, the quantity demanded falls from 100 units to 50 units.

Market Demand Schedule
We know that market for a commodity consists of a large number of consumers. The market demand schedule, unlike the individual demand schedule, shows the aggregate (total) demand for all the consumers in the market at different prices.
Example: Consider a hypothetical market that consists of only two consumers demanding a commodity X. The market demand schedule for X can be represented as:

Price of X (Rs)	Quantity Demanded by Consumer 1 (units)	Quantity Demanded by Consumer 2 (units)	Market Demand (units)
10	5	6	5 + 6 = 11
15	4	5	4 + 5 = 9
20	3	4	3 + 4 = 7
52	2	3	2 + 3 = 5

Demand Function

The demand for a commodity depends on different variables besides the price of that commodity. The relationship between these variables and the demand for a commodity can be expressed in a functional form known as demand function. The demand functions can be of following two types.

1. Individual demand function
2. Market demand function

Individual Demand Function

An individual demand function expresses the relationship between quantity demanded by an individual consumer and various determinants. The following are the major determinants of individual's demand for a good.

• Price of the good
• Price of the other goods- (i.e. price of substitute and complementary goods)
• Income of the consumer
• Consumer's tastes and preferences  

Based on these factors, the individual demand function can be represented as:  

where
P_x represents Price of good X
D_x represents Demand for good X
P_y represents Price of other goods
Y represents Income of consumer
T represents Tastes and preferences

Market Demand Function

Similar to individual demand function, market demand function represents the relationship between the market demand of a good and its various determinants. It can be represented in the following functional form as:

MD_x = f (P_x, P_y, Y, T, N, Y_d)

where
P_x represents Market Price of good X
D_x represents Market Demand for good X
P_y represents Market Price of other goods
Y represents Income of all the consumers
T represents Consumers' tastes and preferences
N represents Population size or number of consumers in…