Demand: Theory of Demand

Meaning of Demand

Demand is not the same as desire or need. Demand for a commodity means desire, willingness and ability to pay. For example, a poor man's desire and willingness to pay for a car is not demand since he does not have ability to pay. Similarly, a person's ability to pay for a car is not demand since he does not have willingness and desire to buy a car. The demand for any commodity is the desire for that commodity baked by willingness and ability to pay. Thus, demand means effective demand, in the sense of being able and willing to buy. Only this affects the volume of sales. 

According to Fredric Benham, "The demand for anything, at a given price is the amount of it which will be bought per unit of time at that price."

In the words of Pappas and Brigham, "The term demand is defined as the number of units of particular goods or service that consumers are willing to purchase during a specific period and under a given set of conditions."

According to Milton H. Spencer, "Demand is the quantity that will be purchased of particular commodity at various prices, at a given time and place."

Thus, demand is always defined with reference to a particular time and given values of variables on which it depends. Two things should be noted in the definition:

First, demand always means demand per unit of time. The time period might be a month or year. We must specify the period for which the commodity is being demanded. The statement that demand for ghee in Kathmandu is 1000kg at Rs. 50 per kg, has no significance unless we state clearly the period for which this quantity is being demanded.

Second, the condition on which the things is demanded should be specified. The conditions would include the price of the good in question, price and availability of competitive goods, expectations of price changes, income, tastes and preference, advertising expenditures and so on. The demand for the product depends on all these factors. For example, the term demand has no significance unless it is related to price. The statement that the weekly demand for ghee in Kathmandu is 1000kg is meaningless unless we specify the price at which the quantity is being demanded by the customers of Kathmandu. The demand may be fairly small if the price is high.

Derivation of Individual and Market Demand Curve

The process of derivation of individual and market demand curve has been explained as follows:

Derivation of Individual Demand Curve

The individual demand schedule is a schedule of prices of commodity and the demand for the commodity made by an individual. Similarly, individual demand curve is the schedule of different quantities of goods demanded by an individual at different prices. The demand schedule shows the relationship between the prices of the commodity and the quantity demanded. The individual demand (for sugar) schedule has been presented in table below:

Individual Demand Schedule
Price (Rs. Per kg)Quantity Demanded (kg per month)
2
4
6
8
10
12
14 
10
7
5
3
2
As shown in the table, the quantity demanded of sugar at price Rs. 2 per kg is 14 kg, at Rs. 4 is 10kg, at Rs. 6 is 7kg, and so on. It shows that the quantity demanded increase with fall in price.

The individual demand curve is derived on the basis of this demand schedule. The individual demand curve DD has been derived in the following figure on the basis of above table.


In the given figure, OY axis represents price of sugar and OX axis represents quantity demanded DD is the demand curve. It shows that the quantity demanded is 14kg at price Rs. 2, 10kg at Rs. 4, 7kg at Rs. 6, 5kg at Rs. 8 and so on. In this way, the demand curve shows the relationship between price of the commodity and quantity demanded. According to R. G. Lipsey, "The demand curve for a commodity shows the relation between its price and a quantity a household wishes to purchase per period of time."

The demand curve has the following characteristics:

  • Traditionally, the price level is shown along the vertical axis and the quantity demanded is shown along the horizontal axis.
  • The demand curve may show the demand of an individual or the group of consumers in the market.
  • The demand curve assumes that there is no change in the value of other relevant variables. This means that the prices of other goods, income of the consumers and taste of consumers are assumed to be constant.
  • In general, the demand curve has negative slope, or the demand curve slopes downwards. This means that people demand more at lower prices.

The law of demand implies this. But there are two exceptions to this – a) The situation of snob appeal – as for example, the expensive jewelry are demanded more at higher prices, but demanded less at lower prices due to the fall in snob appeal. b) The situation in which consumers judge quality by price – as for example, if the consumers do not have ability to judge the quality of the products directly, they use price as the quality. Hence, demand may fall when price falls.

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