Definition of Demand and factors influencing it
The demand for a commodity is its quantity which consumers are able and willing to buy at various prices during a given period of time. Demand is a function of price (p), income (y), prices of related goods (pr) and tastes (f) and is expressed as D = f (p, y, pr, t)
The factors which determine the level of demand for any commodity are the following:
The higher the price of a commodity, the lower the quantity demanded and vice-versa
2. Prices of other Commodities
There are three types of commodities in this context.
If a rise (or fall) in the price of one commodity leads to an increase (or decline) in the demand for another commodity, the two commodities are said to be substitutes. In other words, substitutes are those commodities which satisfy similar wants, such as tea and coffee.
If the price of coffee falls, the demand for coffee rises which brings a fall in the demand for tea because the consumers of tea shift their demand to coffee which has become cheaper.
On the other hand, if the price of coffee rises, its demand will fall. But the demand for tea will rise because the consumers of coffee will shift their demand to tea.
b) Complementary Commodities
Where the demand for two commodities is linked to each other, such as cars and petrol, bread and butter, tea and sugar, etc., they are said to be complementary goods.
A rise in the consumer’s income raises the demand for a commodity, and a fall in his income reduces the demand for it.
The demand schedule reveals that when the price is Rs. 6, the quantity demanded is 10 units.
If the price happens to be Rs 5, the quantity demanded is 20 units, and so on.
Hence when price decreases quantity demand increases.
The Demand Curve is given below.
The going concern principle allows the company to defer some of its prepaid expenses until future accounting periods.
DD1 is the demand curve drawn on the basis of the above demand schedule.
The dotted points D, P, Q, R, S, T and U show the various price-quantity combinations. These are called as demand points.
The first combination is represented by the first dot and the remaining price- quantity combinations move to the right toward D1.
What are the Assumptions of Law of Demand
There is no change in the tastes and preferences of the consumer;
The income of the consumer remains constant
There is no change in customs
The commodity to be used should not confer distinction on the consumer
There should not be any substitutes of the commodity
There should not be any change in the prices of other products
There should not be any possibility of change in the price of the product being used
There should not be any change in the quality of the product
The habits of the consumers should remain unchanged. Given these conditions, the law of demand operates.
If there is change even in one of these conditions, it will stop operating.
Exceptions of law of Demand
If shortage is feared in anticipation of war, people “may start buying for building stocks or for hoarding even when the” price rises.
During a depression, the prices of commodities are very low and the demand for them is also less. This is because of the lack of purchasing power with consumers.
3. Griffin Paradox
If a commodity happens to be a necessity of life like wheat and its price goes up, consumers are forced to curtail the consumption of more expensive foods like meat and fish, and wheat being still the cheapest, food they will consume more of it.
4. Ignorance Effect
Consumers buy more at a higher price under the influence of the “ignorance effect”, where a commodity may be mistaken for some other commodity, due to deceptive packing, label, etc.
When a group unloads a great quantity of a thing on to the market, the price falls and the other group begins buying it.
When it has raised the price of the thing, it arranges to sell a great deal quietly. Thus when price rises, demand also increases.