In economics demand plays an important role in circulating money across the market. If the demand increases then the whole market starts moving to fulfil the demand. Syllabus of UPSC GS paper 3 has economics in it. And students should be clear with the concepts of economics. It is also very essential for the students to keep a track of current affairs related to economics. To read more articles on Economics click here.
TOPICS
- Definition
- Law of Demand
- Determinants od Demand
- Types of Demand
- Elasticity of Demand and its uses
DEFINITION
The demand for a commodity is the amount of it that a consumer will purchase or will be ready to take off from the market at various given prices during a specified time period. This time period may include a day, a week, a month, a year or any given time period. It is noteworthy that mere desire for a commodity does not constitute demand for it, if it is not backed by the ability to pay.
THE LAW OF DEMAND
The law of demand explains the relationship between the price and the quantity demanded. According to the law of demand, other things being constant, if the price of a commodity falls, its quantity demanded will rise, and if the price of the commodity rises, its quantity demanded will decline. Thus, there is an inverse relationship between the price and the quantity demanded, other things remaining the same.
DETERMINANTS OF DEMAND
The following are the factors which determine the demand for goods:
- Price of the Commodity: Normally, rise in price is accompanied by contraction in demand and fall in price is accompanied by expansion in This relationship between price and demand is called the law of demand.
- Tastes and Preferences of the Consumers: The demand for goods and services depends on the individual’s tastes and These terms are used in a broad sense. They include fashion, habit, custom, etc. Tastes and preferences of the consumers are influenced by advertisement, change in fashion, climate, new inventions, etc. Other things being equal, demand for those goods increases for which consumers show a favourable change in tastes and preferences. Contrary to this, an unfavourable change in consumers’ preferences and tastes for a product will cause a fall in its demand.
- Incomes of the People: Experience shows that there is a positive relationship between the income of a consumer and his demand for a An increase in income would generally cause an increase in demand for a commodity. Such goods in case of which positive relationship is found between income and demand are called normal goods; e.g. full-cream milk, wheat and cheese. However, there are certain goods in case of which inverse relationship is found between income and demand: an increase in income causes a decrease in demand. Such goods are called inferior goods; e.g. toned milk, bajra, etc.
- Changes in Prices of Related Goods: The demand for a commodity depends not only on its own price, but also on the prices of related Related goods are broadly classified as substitute goods and complementary goods.
- Substitute Goods: Substitute goods are those goods which can be substituted for each other, such as tea and coffee, or Limca and For example, when the price of tea as well as the incomes of the people remains the same but the price of coffee falls, the consumers would demand less of tea than before. Tea and coffee are very close substitutes; therefore, when coffee becomes cheaper, the consumers substitute coffee for tea, and as a result the demand for tea declines.
- Complementary Goods: Complementary goods are those goods which complete the demand for each other, such as car and petrol or pen and There is an inverse or negative relationship between the demand for the first goods and the price of the second which happens to be complementary to the first.
For the goods which are complementary to each other, the change in the price of any of them would affect the demand of the other. For instance, if the price of milk falls, the demand for sugar will also be affected. When people would take more milk or would prepare more khoya, burfi, rasgullas with milk, the demand for sugar would also increase.
- The number of consumers in the market: The greater the number of consumers of goods, the greater the market demand for For instance, in India the demand for many essential goods, especially foodgrains, has increased because of the increase in the population of the country and the resultant increase in the number of consumers for them.
Changes in propensity to consume: People’s propensity to consume also affects the demand for goods. The income of the people remaining constant, if their propensity to consume rises, then out of the given income, they would spend a greater part of it with the result that the demand for goods will increase. On the other hand, if their propensity to save increases, that is, if the propensity to consume declines, then the consumers would spend a smaller part of their income on goods with the result that the demand for goods will decrease. It is thus clear that with income remaining constant, change in propensity to consume of the people will bring about a change in the demand for goods
TYPES OF DEMAND
Individual and Market Demand
Individual demand means the quantity demanded by an individual consumer at various prices at a given point of time. Market demand means the total quantity demanded by all the buyers at various prices. It reflects the nature of competition and the form of market structure. It provides useful guidance to the management in deciding its market strategy and related corporate policy.
Industry Demand and Company Demand
Industry demand is the total demand for the product of a particular industry; for example, the total demand for shampoo in the country. On the other hand, the demand for any particular brand of shampoo, say, Sunsilk, L’Oreal, Clinic Plus, Clinic All Clear, Pantene and so on is called company demand. Theoretically, an industry should consist of all firms producing an identical product. In practice, however, we take a broad definition of industry, that is one which covers all firms producing similar products which are close substitutes.
Autonomous Demand and Derived Demand
Autonomous demand refers to the demand for a product which is wanted for itself. The demand for any type of food, furniture, T.V., fridge, washing machine, bike, car etc., may be taken as autonomous demand. Autonomous demand is demand for consumer goods or final goods; it is also known as direct demand.
Derived demand, on the other hand, is derived from another direct demand. For instance, the demand for a plot is a direct demand; but the demand for cement, bricks, iron and steel etc., needed for the construction of a house is derived demand.
Joint and Rival Demand
When two goods are used together to satisfy a particular want, they are said to be jointly demanded. The demand of car owners for petrol, tyres lubricating oil and spark plugs may be regarded as joint demand.
Rival demand refers to the case of a product which is demanded for two or more purposes. A good example is cement, which is demanded by industry as well as house construction. If the demand for cement in one use goes up, the supply of cement to the other use will be curtailed. This will change the price of cement and also bring about a change in the demand pattern for cement. Rival demand is also known as composite demand.
ELASTICITY OD DEMAND AND ITS USES
Concept and Kinds of Elasticity of Demand
Elasticity of demand is defined as the responsiveness of the quantity demanded of goods to changes in one of the variables on which demand depends. In other words, it is the percentage change in the quantity demanded divided by the percentage of one of the variables on which demand depends. These variables are price of the commodity, prices of the related commodities, incomes of the consumers and other various factors on which demand depends. Thus we have (i) price elasticity, (ii) cross elasticity, (iii) elasticity of substitution, and (iv) income elasticity.
Uses of Elasticity of Demand
Usefulness to a Monopolist: A monopolist usually fixes the
price himself and leaves the supply to be determined by the demand of the consumers. If the demand for his product is very elastic, he will keep the price low to maximise monopoly profit. On the other hand, if the demand is inelastic, he fixes a higher price and sells a slightly smaller quantity.
Usefulness to the Government: While levying taxes, the Finance Minister takes into consideration the elasticity of demand for the commodities on which taxes are being imposed. High rates of taxation on goods with inelastic demand bring higher amounts of revenues whereas the same on goods having elastic demand may not fetch the desired revenues of the government.
Usefulness in International Trade: India, for example, can obtain better and higher prices for tea from its exports to the UK, if the latter’s demand for Indian tea is inelastic. Thus, the terms of international trade are determined by the elasticity of demand for each other’s product.
Economics is one of the most important part of UPSC syllabus. To read more articles on Economics click here