In our daily life, we often hear the word ‘Demand’ for goods or services. In the business world, the demand of a product determines its value and the profit or loss of a company. So, today in this article, we will understand “what actually is demand?” And “why is it so important for a business?”
What is Demand?
Demand simply means a consumer’s desire to buy goods and services and without any hesitation, and pay the price for it. In simple words, demand is the number of goods that the customers are ready and willing to buy at several prices during a given time frame. Preferences and choices, which are the basics of demand, can be described in terms of the cost, benefits, profit and other variables.
The amount of a good that the customer picks up modestly relies on the cost of the commodity, the cost of other commodities, the customer’s earnings and his or her tastes and proclivity. The amount of a commodity that a customer is ready to purchase and is able to manage and afford provided prices of goods and customer’s tastes and preferences are known as demand for the commodity.
Suggested Reading: Elasticity of Demand
The demand curve is a graphical depiction of the association between the price of a commodity or service and the number demanded for a given time frame. In a typical depiction, the cost will appear on the left vertical axis; the number (quantity) demanded on the horizontal axis is called a demand curve.
Determinants of Demand:
There are many determinants of demand, but the top 5 determinants of demand are as follows:
- Product Cost- Demand of product changes as per the change in the price of the commodity. People decide to buy a product remains constant only if all the factors related to it remains to fix unchanged.
- The income of the Consumers- When income rises, the number of goods demanded, also increases. Likewise, if the income decreases, the demand also decreases.
- Costs of related goods and services- For a complimentary product, an increase in the cost of one commodity will decrease the demand for a complimentary product. Example: An increase in the rate of bread will decrease the demand for butter. Similarly, an increase in the rate of one commodity will generate the demand for a substitute product to increase. Example- Increase in the cost of tea will raise the demand for coffee and therefore, decrease the demand for tea.
- Consumer Expectation- High expectation of income or expectation in the increase of good’s price also leads to an increase in demand. Similarly, low expectation of income or low pricing of goods will decrease the demand.
- Buyers in the Market- If the number of buyers for a commodity is huge or less than there be a shift in demand.
You may also want to know: What are Shifts in the Demand Curve?
Types of Demand
Few important different types of demand are:
- Price demand- It refers to various types of quantities of goods or services which a customer will buy at a coated price and given time, considering other things remain constant.
- Income demand- It refers to various types of quantities of goods or services which a customer will buy at different stages of income, considering other things remain constant.
- Cross demand- This means that the product’s demand doesn’t depend on its own cost but depends on the cost of the other related commodities.
- Direct demand- When goods or services satisfy an individual’s wants directly is known as direct demand.
- Derived demand or Indirect demand- The goods or services demanded or needed for manufacturing goods and which satisfy the consumer indirectly is known as derived demand.
- Joint demand-To produce a product there are many things that are related to each other, for example, to produce bread, we need services like an oven, fuel, flour mill, etc. So, the demand for other additional things to produce a product is known as joint demand.
- Composite demand-A composite demand can be described when goods and services are utilised for more than one cause. Example- Coal.
Must Read: What is Indifference curve analysis?
The Law of Demand
Law of demand is interpreted as ‘quantity demanded of a product comes down if the price of the product goes up, keeping other factors constant.’ That is if the cost of the product goes up, then the aggregate quantity demanded falls. Because the opportunity cost of customer increase which leads customers to go for any other substitute or they may not purchase it. The law of demand and its exceptions are really inquisitive concepts.
Consumer proclivity theory assists us in comprehending which combination of 2 commodities a customer will purchase based on the market prices of the commodities and subject to a customer’s budget restriction. The amount of a commodity a customer actually purchases is the interesting part. This is best elucidated in Microeconomics utilising the demand function.
Also Read: Factors affecting Demand of a Commodity
This is a detailed and elucidated information about the concept of demand. To learn more, stay tuned to BYJU’S.