Demand: meaning, determinants, demand function and types of demand
Managerial Economics · Unit II · Topic 4 of 15 · 5 min read
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1. Meaning of demand
In ordinary speech demand means desire. In economics, desire alone is not demand. Demand is a desire for a commodity backed by the ability to pay and the willingness to pay, and it is always stated with reference to a price and a period of time.
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.”
So “the demand for tea is 500 kg” is incomplete; “the demand for tea is 500 kg a week at Rs. 400 per kg” is a statement of demand.
2. Factors determining demand
- Price of the commodity. The basic determinant. Other things equal, more is bought at a lower price (the law of demand, next note).
- Income of the consumer. For normal goods demand rises with income. For inferior goods (coarse grain, cheap cloth), demand falls as income rises because buyers move to better goods.
- Prices of related goods. For substitutes (tea and coffee), a rise in the price of one raises demand for the other. For complements (car and petrol, pen and ink), a rise in the price of one lowers demand for the other.
- Tastes, preferences and fashion. A change in taste shifts demand regardless of price.
- Expectations. If buyers expect prices to rise or a shortage to come, they buy more now.
- Size and composition of population. More people, more demand; a younger or older population demands different goods.
- Distribution of income. A more equal distribution raises demand for mass consumption goods; an unequal one favours luxuries.
- Advertisement and sales promotion. Especially for consumer brands.
- Credit facilities. Easy instalment credit raises demand for durables such as cars, two-wheelers and housing.
- Government policy. Taxes (GST rates), subsidies and controls change effective prices and therefore demand.
- Climate and season. Umbrellas in the monsoon, woollens in winter.
3. The demand function
The relationship between quantity demanded and its determinants is written as:
Dx = f(Px, Y, Pr, T, E, N, A …)
where Dx is the quantity of X demanded, Px its price, Y income, Pr prices of related goods, T tastes, E expectations, N population and A advertising. The law of demand studies only Dx = f(Px), holding the other factors constant (ceteris paribus). A simple linear form is D = a − bP: for example, D = 100 − 2P gives demand of 80 units at Rs. 10 and 60 units at Rs. 20.
4. Change in quantity demanded versus change in demand
| Extension / contraction | Increase / decrease | |
|---|---|---|
| Cause | Change in own price only | Change in any other factor |
| On the diagram | Movement along the same curve | Shift of the whole curve |
| Example | Price of tea falls, more tea bought | Income rises, more tea bought at the same price |
A shift to the right is an increase in demand; to the left, a decrease.
5. Types of demand
- Individual and market demand. Individual demand is the quantity one buyer takes at each price. Market demand is the horizontal sum of all individual demands.
- Price, income and cross demand. Price demand relates quantity to the commodity’s own price; income demand to the buyer’s income; cross demand to the price of a related good.
- Joint (complementary) demand. Goods demanded together to satisfy one want: car and petrol, printer and cartridges.
- Composite demand. A good with several uses has a composite demand: electricity for lighting, industry and transport; steel for construction and vehicles.
- Derived and autonomous (direct) demand. Demand for factors of production and inputs is derived from demand for the final good (demand for cement from demand for houses). Demand for a consumer good for its own sake is autonomous or direct.
- Demand for durable and non-durable goods. Durables (refrigerators, machines) are used over many years and their purchase can be postponed, so their demand is more volatile. Non-durables (food) are used once.
- Firm demand and industry demand. Demand for the output of one firm (a single car maker) as against demand for the output of the whole industry.
- Short-run and long-run demand. Short-run demand reacts to immediate price changes; long-run demand reflects adjustments in habits and the availability of substitutes.
- Consumer goods and producer goods demand. Goods for final consumption versus goods used to produce other goods.
- New demand and replacement demand. First purchases versus replacing worn-out items; important for forecasting durables.
6. Elasticity of demand, briefly
Elasticity measures how far quantity demanded responds to a change in a determinant. Price elasticity = percentage change in quantity demanded ÷ percentage change in price. If price rises from Rs. 10 to Rs. 11 (10%) and quantity falls from 100 to 85 (15%), elasticity is 1.5: demand is elastic. Income and cross elasticity are defined in the same way. The idea matters for pricing: a firm facing elastic demand gains revenue by lowering price; one facing inelastic demand gains by raising it.
How this is examined
January 2026 set both “Types of demand” and “Factors determining demand” as the Unit II short notes. The essay question in Unit II is usually on the law of demand or on forecasting, and the determinants are a natural opening paragraph for both. Use numbered headings, an example for each, and the demand function written out.
Now try the real questions: Managerial Economics past question papers.