We have already discussed the law of demand and what is demand in our previous article. Moving further, in this article we will try to explore the main type of demand and how they react to various determinants of demand. The following article will provide you a deep understanding of this.
Type of demand
There are eight types of demand that one should have an understanding of. As it helps in identifying the relationships between price and quantity demanded. each of these has a unique feature. like, some are affected by their own price. Whereas, others are subject to the price of other goods. let understand in detail. subsequently, we will discuss the various variables of demand
Clearly, as the name specifies it considers demand by one person or household. Any quantity demand by a single individual at a given price is called individual demand. The very factors affecting individual demand are price, income, substitute goods, taste, preferences, and advertisement. Hence, any change in the above-mentioned factors can lead to a change in demand by an individual or household.
Market demand is the combination of demand by all individuals. When one can add up the unit demanded by all the persons we can create a market demand schedule and market demand curve. This is more important for business. By finding out the total potential demand businesses can better plan their future. They can find out how much production they should do. Along with this, they can make arrangements for required raw materials.
In our daily life, we come across many products which require other products for performance. Joint demand is another type of demand case. Here you need two or more products for working. For instance, car and petrol, bread and butter, ink and fountain pen.
Generally in such a case, the price of one thing and quantity demanded of the other are inversely related.
For example, a rise in the petrol rate may dissuade car buyers to go for the petrol version. So the demand and quantity here are related in a negative way. On the other hand, a decrease in the petrol charge can encourage people to have a petrol car.
Composite demand is another kind under the type of demand. Pherpahps, each day we see many products which are used in multiple ways. Any change in product prices can have changed to its by-product or variants as well. For instance, iron, it is used in many ways. of course, any chnage in price of iron will change prices of all the product segments.
Direct demand v/s Indirect demand
Direct demand is very easy to understand. In case we purchase a product for direct consumption, it is called direct demand. Whereas if a certain product is a demand for making another product we call it derived demand or indirect demand. Milk is an example of direct and derived demand. As it can be directly consumed or can be used for making other products.
Yet another demand type is substitute demand that occurs in the event of competitive products. Let’s assume there are two product beverages ‘A’ and ‘B’. if the price of beverage ‘a’ inclines then the people will move from beverage’ A’ to ‘B’. In reality, the world is full of such examples. Coca-cola and Pepsi, tea and coffee. it is to note, that price of commodity ‘a’ and the quantity of commodity ’B’ are positively related to each other. The rise in price will encourage the demand of its competitive.
Perishable goods v/s durable goods
Perishable goods are goods with short shelf life. Therefore, they have to be used in a short time duration otherwise they will perish. Such goods have single-use and after that, they have to be purchased again. Milk, vegetable, and fast-moving consumer goods are the common illustrations. On the other hand, there are many goods which do not need frequent replacement. Thus, they are called durable goods. Table, chairs, televisions are out of some examples of durable goods. In fact, they don’t need immediate changes and have a long life.
Industry demand V/s company demand
Actually, this is similar to individual and market demand. Let’s consider the company as an individual in the industry. So, total demand by a company is called company demand. On the other hand when we combine demand of all the companies in an industry. It becomes industry demand.
Suppose, a cement manufacturing company demands raw material of 100 kg of fuel for cement manufacturing. Here, the company demand for fuel is 100kg. However, if 3 companies in cement manufacturing company demand 50 kg fuel each. The total demand of industry comes to 150 kgs.
Determinants of demand
I hope the type of demand is clear now. let’s have a look at determinants of demand. In economics, the concept of demand plays a pivotal role in the development of other theories. Demand is the fundamental component of microeconomics. In the market, there are various components that exert a strong influence over the customer and market demand. The main factors affecting the demand are as follows which can affect the different type of demand differently
Own price of commodity
The price of the commodity perhaps is the most important factor. It can affect every type of demand. When the price of a commodity is low more of this will be consumed. On the other hand, people will demand less when the price goes up. In fact, this is the relation which law of demand tries to explore. in other words, the price of a good and its quantity is related in a negative way in any given situation. While the price remains up quantity demanded remains low as per the law of demand. Hence, price is one of the most important variables influencing demand. own price of the commodity does not cause a shift of the demand curve. other factors cause shift movement.
Taste and preference
Any commodity with great taste and preference shows more demand. When people’s taste changes they start shifting to other products. Such changes occur due to changing fashion and trends. While customer interests are shaped over the long term. Still, advertisers and sellers through advertisements try to change the customer’s perception. When advertisements are rolled out they they try to shift the demand curve to the right.
Income of people
Yet another important component affecting demand is income. When the income rises it shifts the entire demand curve upwards. While the decrease in real income can create a downwards movement of the curve. Because, now people have more money to make purchases they go for more demand and vice versa. This causes the shifting of the curve. ultimately, income and demand reflect a positive relationship with each other.
Change in the price of complementary and substitutes
When the price of related goods like complementary or substitute changes it moves the demand curve either way. When the price of a substitute decreases, demand for the original commodity takes a dive and vice versa. Similarly, a price rise in one complimentary product can limit the demand of others. The rise in petrol prices affects petrol car demand in a negative way. Hence, movement in the price of one good tends to affect other’s quantity in a negative way.
How much advertisement and awareness about your product you create is also a factor. Sellers and manufacturers restore to heavy advertisements to get their products sold. Through advertisement, they try to change people’s perceptions, tastes, and preferences. They try to persuade people about their product. The sole purpose of advertisement is to influence the behavior of customers. The advertiser often tries to do this by way of television, radio, and online platform
This is quite a simple factor to understand. Higher the population more will be the demand and vice versa. When population increases it shifts the demand curve on the right side while any decrease leads the demand curve to the left side. This is a very important market demand factor. for example, the population of India is very high. Hence, it can be a great consumer market like china
The shift in the demand curve
Finally, after determinants of demand and type of demand, we are ready to know the shifting of the curve. It is also called the change in demand In the article based on the law of demand, it has been mentioned that there are many factors that influence the demand of people. These factors can affect both types of demand namely individual and market demand. The shift in demand curve means when the entire demand curve either moves to the left side or right side of the graph. The above-mentioned factors or determinants of demand are the prime reasons for such shifting.
Leftwards shift of demand curve
This takes place when the price is constant however other determinants vary. Any change in income, substitute goods price, taste, preference, and population can move the demand curve to the left. This can reduce the demand. Though the price is the same, any reduction in income shall result in a contraction in demand. Ultimately, a new demand curve will emerge to the left. The following chart will clear it.
Clearly, the chart reflects the moving of the demand curve downwards. Initially, At the price P1 quantity demanded was Q1 and the demand curve was DD. However, as any factors varied( in our example let’s suppose income reduce), it shifted the demand curve to the left. The new demand curve shows the same price but, new and reduced quantity Q2. The new demand curve is D1D1.
The rightward shift of the demand curve
determinants of demand can lead the demand curve to the right also. For instance, any population increase or income increase can increase the quantity demanded without changing the price at all. When the demand curve goes upward or right side, it increases the quantity demanded. Take the following example and chart for instance,
DD is the demand curve and P1 is the price. Apparently, at this price Q1 is the quantity demanded. Though there is no price change, still, the new demand curve D1D1 emerges next to DD. Finally, the number of goods purchased changes and reaches Q2. This trend is due to a change of factors in a positive way. In our case, it may be due to population increase or income increment.
Change in demand vs change in quantity demanded
These are the two extreme situations. when pricing the responsible for the change in the quantity of a commodity. we call it a change in quantity demand or change along the demand curve. On the other hand, if the demand of quantity is changing due to non-price determinants. We call it a shift in demand or a change in demand that we have just discussed. In the latter. case, the entire demand curve shifts upwards or downwards.
The type of demand, determinants of demand, and shifting of the curve are very important to understand in economics. The type of demand helps to understand how price can affect different demand types, determinants and shifting of curve help to identify as to what factors are responsible for movement of demand.
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