Managerial Economics - Demand Analysis
Demand Distinctions: Types Of Demand - Demand Analysis
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Demand may be defined as the quantity of goods or services desired by an individual, backed by the ability and willingness to pay.
Demand Distinctions: Types Of Demand
Demand may be defined as the quantity of goods or services desired by an individual, backed by the ability and willingness to pay.
1.Direct and indirect demand: (or) Producers’ goods and consumers’ goods: demand for goods that are directly used for consumption by the ultimate consumer is known as direct demand (example: Demand for T shirts). On the other hand demand for goods that are used by producers for producing goods and services. (example: Demand for cotton by a textile mill)
2.Derived demand and autonomous demand: when a produce derives its usage from the use of some primary product it is known as derived demand. (example: demand for tyres derived from demand for car) Autonomous demand is the demand for a product that can be independently used. (example: demand for a washing machine)
3.Durable and non durable goods demand: durable goods are those that can be used more than once, over a period of time (example: Microwave oven) Non durable goods can be used only once (example: Band-aid)
4.Firm and industry demand: firm demand is the demand for the product of a particular firm. (example: Dove soap) The demand for the product of a particular industry is industry demand (example: demand for steel in India )
5.Total market and market segment demand: a particular segment of the markets demand is called as segment demand (example: demand for laptops by engineering students) the sum total of the demand for laptops by various segments in India is the total market demand. (example: demand for laptops in India)
6.Short run and long run demand: short run demand refers to demand with its immediate reaction to price changes and income fluctuations. Long run demand is that which will ultimately exist as a result of the changes in pricing, promotion or product improvement after market adjustment with sufficient time.
7.Joint demand and Composite demand: when two goods are demanded in conjunction with one another at the same time to satisfy a single want, it is called as joint or complementary demand. (example: demand for petrol and two wheelers) A composite demand is one in which a good is wanted for several different uses. ( example: demand for iron rods for various purposes)
8.Price demand, income demand and cross demand: demand for commodities by the consumers at alternative prices are called as price demand. Quantity demanded by the consumers at alternative levels of income is income demand. Cross demand refers to the quantity demanded of commodity ‘X’ at a price of a related commodity ‘Y’ which may be a substitute or complementary to X.
Price Demand: The ability and willingness to buy specific quantities of a good at the prevailing price in a given time period.
Income Demand: The ability and willingness to buy a commodity at the available income in a given period of time.
Market Demand: The total quantity of a good or service that people are willing and able to buy at prevailing prices in a given time period. It is the sum of individual demands.
Cross Demand: The ability and willingness to buy a commodity or service at the prevailing price of the related commodity i.e. substitutes or complementary products. For example, people buy more of wheat when the price of rice increases.
Exceptional demand curve: The demand curve slopes from left to right upward if despite the increase in price of the commodity, people tend to buy more due to reasons like fear of shortages or it may be an absolutely essential good.
The law of demand does not apply in every case and situation. The circumstances when the law of demand becomes ineffective are known as exceptions of the law. Some of these important exceptions are as under.
1. Giffen Goods:
Some special varieties of inferior goods are termed as Giffen goods. Cheaper varieties millets like bajra, cheaper vegetables like potato etc come under this category. Sir Robert Giffen of Ireland first observed that people used to spend more of their income on inferior goods like potato and less of their income on meat. After purchasing potato the staple food, they did not have staple food potato surplus to buy meat. So the rise in price of potato compelled people to buy more potato and thus raised the demand for potato. This is against the law of demand. This is also known as Giffen paradox.
2. Conspicuous Consumption / Veblen Effect:
This exception to the law of demand is associated with the doctrine propounded by Thorsten Veblen. A few goods like diamonds etc are purchased by the rich and wealthy sections of society. The prices of these goods are so high that they are beyond the reach of the common man. The higher the price of the diamond, the higher its prestige value. So when price of these goods falls, the consumers think that the prestige value of these goods comes down. So quantity demanded of these goods falls with fall in their price. So the law of demand does not hold good here.
3. Conspicuous Necessities:
Certain things become the necessities of modern life. So we have to purchase them despite their high price. The demand for T.V. sets, automobiles and refrigerators etc. has not gone down in spite of the increase in their price. These things have become the symbol of status. So they are purchased despite their rising price.
4. Ignorance:
A consumer’s ignorance is another factor that at times induces him to purchase more of the commodity at a higher price. This is especially true, when the consumer believes that a high-priced and branded commodity is better in quality than a low-priced one.
5. Emergencies:
During emergencies like war, famine etc, households behave in an abnormal way. Households accentuate scarcities and induce further price rise by making increased purchases even at higher prices because of the apprehension that they may not be available. . On the other hand during depression, , fall in prices is not a sufficient condition for consumers to demand more if they are needed.
6. Future Changes In Prices:
Households also act as speculators. When the prices are rising households tend to purchase large quantities of the commodity out of the apprehension that prices may still go up. When prices are expected to fall further, they wait to buy goods in future at still lower prices. So quantity demanded falls when prices are falling.
7. Change In Fashion:
A change in fashion and tastes affects the market for a commodity. When a digital camera replaces a normal manual camera, no amount of reduction in the price of the latter is sufficient to clear the stocks. Digital cameras on the other hand, will have more customers even though its price may be going up. The law of demand becomes ineffective.
8. Demonstration Effect:
It refers to a tendency of low income groups to imitate the consumption pattern of high income groups. They will buy a commodity to imitate the consumption of their neighbors even if they do not have the purchasing power.
9. Snob Effect:
Some buyers have a desire to own unusual or unique products to show that they are different from others. In this situation even when the price rises the demand for the commodity will be more.
10. Speculative Goods/ Outdated Goods/ Seasonal Goods:
Speculative goods such as shares do not follow the law of demand. Whenever the prices rise, the traders expect the prices to rise further so they buy more.
Goods that go out of use due to advancement in the underlying technology are called outdated goods. The demand for such goods does not rise even with fall in prices
11. Seasonal Goods:
Goods which are not used during the off-season (seasonal goods) will also be subject to similar demand behaviour.
12. Goods In Short Supply:
Goods that are available in limited quantity or whose future availability is uncertain also violate the law of demand.
Demand may be defined as the quantity of goods or services desired by an individual, backed by the ability and willingness to pay.
Types Of Demand:
1.Direct and indirect demand: (or) Producers’ goods and consumers’ goods: demand for goods that are directly used for consumption by the ultimate consumer is known as direct demand (example: Demand for T shirts). On the other hand demand for goods that are used by producers for producing goods and services. (example: Demand for cotton by a textile mill)
2.Derived demand and autonomous demand: when a produce derives its usage from the use of some primary product it is known as derived demand. (example: demand for tyres derived from demand for car) Autonomous demand is the demand for a product that can be independently used. (example: demand for a washing machine)
3.Durable and non durable goods demand: durable goods are those that can be used more than once, over a period of time (example: Microwave oven) Non durable goods can be used only once (example: Band-aid)
4.Firm and industry demand: firm demand is the demand for the product of a particular firm. (example: Dove soap) The demand for the product of a particular industry is industry demand (example: demand for steel in India )
5.Total market and market segment demand: a particular segment of the markets demand is called as segment demand (example: demand for laptops by engineering students) the sum total of the demand for laptops by various segments in India is the total market demand. (example: demand for laptops in India)
6.Short run and long run demand: short run demand refers to demand with its immediate reaction to price changes and income fluctuations. Long run demand is that which will ultimately exist as a result of the changes in pricing, promotion or product improvement after market adjustment with sufficient time.
7.Joint demand and Composite demand: when two goods are demanded in conjunction with one another at the same time to satisfy a single want, it is called as joint or complementary demand. (example: demand for petrol and two wheelers) A composite demand is one in which a good is wanted for several different uses. ( example: demand for iron rods for various purposes)
8.Price demand, income demand and cross demand: demand for commodities by the consumers at alternative prices are called as price demand. Quantity demanded by the consumers at alternative levels of income is income demand. Cross demand refers to the quantity demanded of commodity ‘X’ at a price of a related commodity ‘Y’ which may be a substitute or complementary to X.
Price Demand: The ability and willingness to buy specific quantities of a good at the prevailing price in a given time period.
Income Demand: The ability and willingness to buy a commodity at the available income in a given period of time.
Market Demand: The total quantity of a good or service that people are willing and able to buy at prevailing prices in a given time period. It is the sum of individual demands.
Cross Demand: The ability and willingness to buy a commodity or service at the prevailing price of the related commodity i.e. substitutes or complementary products. For example, people buy more of wheat when the price of rice increases.
Exceptional demand curve: The demand curve slopes from left to right upward if despite the increase in price of the commodity, people tend to buy more due to reasons like fear of shortages or it may be an absolutely essential good.
The law of demand does not apply in every case and situation. The circumstances when the law of demand becomes ineffective are known as exceptions of the law. Some of these important exceptions are as under.
1. Giffen Goods:
Some special varieties of inferior goods are termed as Giffen goods. Cheaper varieties millets like bajra, cheaper vegetables like potato etc come under this category. Sir Robert Giffen of Ireland first observed that people used to spend more of their income on inferior goods like potato and less of their income on meat. After purchasing potato the staple food, they did not have staple food potato surplus to buy meat. So the rise in price of potato compelled people to buy more potato and thus raised the demand for potato. This is against the law of demand. This is also known as Giffen paradox.
2. Conspicuous Consumption / Veblen Effect:
This exception to the law of demand is associated with the doctrine propounded by Thorsten Veblen. A few goods like diamonds etc are purchased by the rich and wealthy sections of society. The prices of these goods are so high that they are beyond the reach of the common man. The higher the price of the diamond, the higher its prestige value. So when price of these goods falls, the consumers think that the prestige value of these goods comes down. So quantity demanded of these goods falls with fall in their price. So the law of demand does not hold good here.
3. Conspicuous Necessities:
Certain things become the necessities of modern life. So we have to purchase them despite their high price. The demand for T.V. sets, automobiles and refrigerators etc. has not gone down in spite of the increase in their price. These things have become the symbol of status. So they are purchased despite their rising price.
4. Ignorance:
A consumer’s ignorance is another factor that at times induces him to purchase more of the commodity at a higher price. This is especially true, when the consumer believes that a high-priced and branded commodity is better in quality than a low-priced one.
5. Emergencies:
During emergencies like war, famine etc, households behave in an abnormal way. Households accentuate scarcities and induce further price rise by making increased purchases even at higher prices because of the apprehension that they may not be available. . On the other hand during depression, , fall in prices is not a sufficient condition for consumers to demand more if they are needed.
6. Future Changes In Prices:
Households also act as speculators. When the prices are rising households tend to purchase large quantities of the commodity out of the apprehension that prices may still go up. When prices are expected to fall further, they wait to buy goods in future at still lower prices. So quantity demanded falls when prices are falling.
7. Change In Fashion:
A change in fashion and tastes affects the market for a commodity. When a digital camera replaces a normal manual camera, no amount of reduction in the price of the latter is sufficient to clear the stocks. Digital cameras on the other hand, will have more customers even though its price may be going up. The law of demand becomes ineffective.
8. Demonstration Effect:
It refers to a tendency of low income groups to imitate the consumption pattern of high income groups. They will buy a commodity to imitate the consumption of their neighbors even if they do not have the purchasing power.
Some buyers have a desire to own unusual or unique products to show that they are different from others. In this situation even when the price rises the demand for the commodity will be more.
10. Speculative Goods/ Outdated Goods/ Seasonal Goods:
Speculative goods such as shares do not follow the law of demand. Whenever the prices rise, the traders expect the prices to rise further so they buy more.
11. Seasonal Goods:
Goods which are not used during the off-season (seasonal goods) will also be subject to similar demand behaviour.
12. Goods In Short Supply:
Goods that are available in limited quantity or whose future availability is uncertain also violate the law of demand.
Tags : Managerial Economics - Demand Analysis
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