ECONOMIC ANALYSIS

Module 2. Theory of demand

Lesson 7
DEMAND SCHEDULE, DEMAND FUNCTION, DETERMINANTS OF DEMAND

7.1 Introduction

Demand of a commodity is influenced by many factors which can be shown by demand function. This chapter describes demand schedule, demand function and determinants of demand.

7.2 Demand Schedule

This is a relationship of price and quantity demanded of a particular commodity indicated in the form of a table. It shows the exact quantity demanded by the consumer corresponding to a particular price at a particular point of time. There are 2 types of demand schedules.

Individual demand Schedule: This shows the quantity demanded by an individual consumer for a specific time period. Following table indicates imaginary individual demand schedule for a consumer.

Table 7.1 Individual demand schedule

a) The individual demand schedule represents only variation in demand at different price. It represents purchasing behavior by consumer at different prices. It highlights the characteristics of law of demand that higher the price, lower is the quantity demanded and vice versa.

b) Market demand schedule: It is simply summation of individual demand schedules of individual consumers in particular market segment at a particular point of time.

Following table shows the imaginary market schedule assuming only four buyers in a particular market

Table 7.2 Market demand schedule

7.3 Demand Function

Demand for a product depends upon many variables. A demand function is a mathematical expression showing functional relationship between demand and dependent variables considering the most common variables affecting the demand, a common generalized demand schedule can be expressed as follows.

D_z = f (P, Ps, Pc, d, T, A, N, E), Where

D_z = Quantity demanded of goods Z

P_s and Pc = Price of substitute and complimentary goods respectively

d = Disposable income of consumer

T = Change in taste and preference of consumers

A = Impact of promotion and specifically advertisement

N = Population change

E = Any other unspecified variable impacting demand

7.4 Determinants of Demand

Demand depends upon following determinants

1. Price of the goods: This is one of the important determinants of demand of goods. Generally less quantity is demanded at higher price then lower price.

2. Consumer’s income: This determines consumers purchasing power. Higher the income, higher will be the demand for necessary and luxury items.

3. Taste, habits and Preferences: Consumer taste, habits and preferences affect the demand. Demand of products are dependent upon criteria like vegetarian, non vegetarian, addiction to drinks, drugs or cigarettes.

4. Price of other related goods: If a demand can be satisfied with other similar type of good then it is a substitute, e.g. different types of cooking oils are substitute. Thus if price of groundnut oil increases, consumers may go for cotton seed oil which is relatively cheaper. If satisfaction of a want requires more than one good, then those goods are referred to as complimentary goods. For e.g. vehicle and fuel. In case of complimentary goods, if price of one increases the demand for other complementary goods decreases and vice versa. Thus, when price of fuel (petrol and diesel) increase, the demand for household vehicles (Two wheelers and four wheelers) decreases.

5. Buyer’s expectation: If a buyer expects decreases in price in future, they may demand less in present and if they expect increase in price in future, they may buy more in present times.

6. Promotional effect: In present day modern world, demand for many of the consumer durables is affected by promotional methods (advertising, sales promotion, publicity) etc used by the organizations.

7. Demographic profile: The total number and its age structure as well as sex ratio of people living in the country also impact the demand.

8. Scientific developments: With research and development new items enter the market with more added features e.g. electronic goods which creates new demands

9. Government policy: Government policy of taxation including both income tax and sales tax determines the price goods and purchasing power of customers determines demand of goods.

Fashion and social rules: Demand for goods are also influenced by prevailing fashion and customers of society e.g. demand of clothes differs in India and America.