A consumer’s demand for a product represents his desire for it, provided such desire is supported by his willingness to pay for it, as and when the product is offered. Desire for a luxury car cannot become its demand unless the person, who desires it, possesses the purchasing power and is willing to exchange the car with it.
In other words, demand means authentic claim on the product. If a person does not possess the requisite amount of money to pay for, his desire for the product cannot represent his demand for it.
Likewise, if an individual refuses to exchange the product with money at the last minute due to reasons whatsoever, his desire for it cannot pass as his demand for it. Thus, ‘demand is desire supported by purchasing power and willingness to purchase.’
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An individual may be willing to buy the product under certain conditions.
(i) The price of the product remains unchanged at the time of purchase.
(ii) The prices of the substitute goods remain unchanged. For instance, suppose the price of coffee in a local cafe falls. Its demand would go up only when the price of its substitute, tea, remains unchanged.
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If tea also becomes cheaper, demand for coffee may not register the same increase as it would have the price of the substitute tea remained unchanged. Price of tea remaining unchanged, demand will shift from tea to coffee when price of coffee falls.
(iii) The prices of the complementary goods remain unchanged. A hike in price of petroleum affects the demand for cars adversely despite car prices remain unchanged. Here, petroleum is a complementary good for cars.
Hence the price of petroleum should remain unchanged along with that of the car itself so that the consumer may execute his decision to buy the car as soon as he has the requisite purchasing power.
(iv) Tastes, preferences, fashions, etc., in respect of the product remain unchanged. Changes in any of these may lead to a change of mind of the prospective buyer.
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Having discussed the conditions that sustain the buyer’s desire for the product, we are set to state the ‘Law of Demand’ as below.
Other things remaining unchanged (ceteris paribus), more of a product is demanded at a lower price and less at a higher price.
The ‘other things’ referred to in this definition are
i. The prices of related goods (substitutes and complements)
ii. The income of consumers/buyers
iii. Tastes, preferences and fashions
These three factors are known as ‘shift-factors’ in respect of the price-demand (variation of demand with price) relationship because a change in any one of these results in a parallel shift in the demand curve.
Representing quantity demanded on the horizontal axis and the price associated on the vertical axis, we can portray the inverse relationship between demand and price as in Figures. 2.1 and 2.2. Tabular presentation of levels of demand at respective prices is called a ‘demand schedule’ while the curve obtained on plotting the demand schedule on a graph, the ‘demand curve’.
The mathematical relationship between quantity demanded and price, while the shift factors remain unchanged, is called the ‘demand function’ or the ‘demand equation’. For example, expressions such as those given below represent demand functions.
1. QD = a – b P (linear demand)
2. QD = c/P (non-linear demand)
Where, a, b and c are constants.
It is possible to define variation of demand with income, called the income-demand, as portraying the direct variation of demand with changes in consumer’s income, other things (price, prices of related goods, tastes, preferences and fashions) remaining unchanged.
Likewise, cross-demand—demand for good A when price of good B changes— can also be portrayed given the price of the product, the income of the consumers and the prevalent tastes, preferences, and fashions. We will examine all these situations in the next section.