Demand and Price

What is demand?

Demand is the desire of individuals or groups, consumers or firms to own something (product) when they have the ability and willingness to pay for it. The amount of product that consumers want to purchase in a specified period is called the quantity demanded per period. For example the desire of a certain number of individuals to own and pay willingly for one million mangoes in a week time is the demand for a million mangoes per week.

As we have seen in the above definition, demand can either of individuals or firms. It can by in the form of physical products or services. Moreover, the definition of demand also tells us that individuals and firms can be demanders as well as suppliers. When a firm purchases inputs, it is the firm’s demand. When a firm sells the products, it is their supply. An individual buying products has demand for them, while working for someone, the same individual is a supplier of his services.

Variables of Demand or the Demand Function

There are five main variables which act as the determinants of quantity demanded. This is also known as the demand function. These five variables are:

  1. The price of the product
  2. The price of other products
  3. The consumer’s income and wealth
  4. Environmental characteristics
  5. The consumer’s taste.

These variable acts as determinants of the demand. That means that a change in any of these variables will have an effect on the quantity demanded. If the price of the product comes down, its demand may rise; if the price other other products go up, demand for the first product may rise and vice versa.  The demand function can mathematically represented as under:

The equation of demand function

In this equation:

the left side is quantity demanded

Pn…..Pn-1 indicate the prices of all other products.

Y stands for income

E stands for other factors such as environmental, social, number of people in a household etc.

The equation shows that the demand for a certain product changes with the change in the variable ceteris paribus (Other things being equal).

Demand and Price

In Economics the basic hypothesis is that “the lower the price of a product, the greater the quantity that will be demanded, ceteris paribus (other things being equal).”

The higher the prices goes, the lower will be the demand, the lower the price comes down, the higher will the demand of a certain product. For example, if oranges sell £1 per kilo, a certain individual’s demand for oranges may be 2 kilos (hypothetically speaking). If the price goes up to £1.50, the demand for oranges may come down to one and half a kilo. If the prices comes down to £0.75, the demand for it may go up to 3 kilos.

Sometimes, students get confused because they ignore the ceteris paribus or other things being equal phrase. The demand shall behave in this manner only if other variables such as income (or wealth), price of other products, consumer’s tastes, and environmental issues remain constant. The relationship between demand and price can be indicated by the following curve.

Diagram showing relationship between demand and price

 

 

 

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