Concept of Demand

Demand refers to the quantity of a commodity or a service that people are willing to buy at a
certain price during a certain time interval. It can be termed as a desire with the willingness and
ability to pay for a commodity.

An increase in the price of the commodity decrease the demand for that commodity, while the
decrease in price increases its demand. The phenomena is termed as law of demand.

Concept of Demand Function

Demand function is an algebraic expression that shows the functional relationship between the
demand for a commodity and its various determinants affecting it. This includes income and
price along with other determining factors.

Here, the demand for the commodity is the dependent variable, while its determinants are the
independent variables.

Determinants of Demand

Price of the given commodity

Other things remaining constant, the rise in price of the commodity, the demand for the
commodity contracts, and with the fall in price, its demand increases.

Price of related goods

Demand for the given commodity is affected by price of the related goods, which is called cross
price demand.

Income of the individual consumer

Change in consumers level of income also influences their demand for different commodities.
Normally, the demand for certain goods increase with the increasing level of income and vice
versa.

Tastes and preferences

The taste and preferences of individuals also determine the demand made for certain goods and
services. Factors such as climate, fashion, advertisement, innovation, etc. affect the taste and
preference of the consumers.

Expectation of change in price in the future

If the price of the commodity is expected to rise in the future, the consumer will be willing to
purchase more of the commodity at the existing price. However, if the future price is expected to
fall, the demand for that commodity decreases at present.

Size and composition of population

The market demand for a commodity increases with the increase in the size and composition of
the total population. For instance, with the increase in total population size, there is an increase
in the number of buyers. Likewise, with an increase in the male composition of the population,
the demand for goods meant for male increases.

Season and weather

The market demand for a certain commodity is also affected by the current weather conditions.
For instance, the demand for cold beverages increase during summer season.

Distribution of income

In case of equal distribution of income in the economy, the market demand for a commodity
remains less. With an increase in the unequal distribution of income, the demand for certain
goods increase as most people will have the ability to buy certain goods and commodities,
especially luxury goods.

Types of Demand Function

Based on whether the demand function is in relation to an individual consumer or to all

consumers in the market, the demand function cab be categorized as

Individual Demand Function

Market Demand Function

Individual Demand Function

Individual demand function refers to the functional relationship between demand made by an
individual consumer and the factors affecting the individual demand. It shows how demand made
by an individual in the market is related to its determinants.

Mathematically, individual demand function can be expressed as,

Dx= f (Px, Pr, Y, T, F)

Where,

Dx= Demand for commodity x;

Px= Price of the given commodity x;

Pr= Price of related goods;

Y= Income of the individual consumer;

T= Tastes and preferences;

F= Expectation of change in price in the future.

Market Demand Function

Market demand function refers to the functional relationship between market demand and the
factors affecting market demand. Market demand is affected by all the factors that affect an
individual demand. In addition to this, it is also affected by size and composition of population,
season and weather conditions, and distribution of income.

Mathematically, market demand function can be expressed as,

Dx= f (Px, Pr, Y, T, F, Po, S, D)

Where,

Dx= Demand for commodity x;

Px= Price of the given commodity x;

Pr= Price of related goods;

Y= Income of the individual consumer;

T= Tastes and preferences;

F= Expectation of change in price in the future;

Po= Size and composition of population;

S= Season and weather;

D= Distribution of income.