Demand
In economics, demand is the quantity of a commodity or
a service that people are willing or able to buy at a certain
price.[1]
The relationship between price and quantity demanded is
also known as demand curve. Preferences and choices,
which underly demand, can be represented as functions
of cost, benet, odds and other variables.
1 Determinants of (Factors aect-
ing) demand
Innumerable factors and circumstances could aect a
buyers willingness or ability to buy a good. Some of the
more common factors are:
Goods own price: The basic demand rela-
tionship is between potential prices of a good
and the quantities that would be purchased
at those prices. Generally the relationship
is negative meaning that an increase in price
will induce a decrease in the quantity de-
manded. This negative relationship is embod-
ied in the downward slope of the consumer de-
mand curve. The assumption of a negative re-
lationship is reasonable and intuitive. If the
price of a new novel is high, a person might de-
cide to borrow the book from the public library
rather than buy it.
Price of related goods: The principal related
goods are complements and substitutes. A
complement is a good that is used with the
primary good. Examples include hotdogs and
mustard, beer and pretzels, automobiles and
gasoline. (Perfect complements behave as a
single good.) If the price of the complement
goes up the quantity demanded of the other
good goes down. Mathematically, the variable
representing the price of the complementary
good would have a negative coecient in the
demand function. For example, Q = a - P -
P where Q is the quantity of automobiles de-
manded, P is the price of automobiles and P is
the price of gasoline. The other main category
of related goods are substitutes. Substitutes are
goods that can be used in place of the primary
good. The mathematical relationship between
the price of the substitute and the demand for
1
the good in question is positive. If the price
of the substitute goes down the demand for the
good in question goes down.
Personal Disposable Income: In most cases,
the more disposable income (income after tax
and receipt of benets) a person has the more
likely that person is to buy.
Tastes or preferences: The greater the desire
to own a good the more likely one is to buy the
good. There is a basic distinction between de-
sire and demand. Desire is a measure of the
willingness to buy a good based on its intrinsic
qualities. Demand is the willingness and ability
to put ones desires into eect. It is assumed
that tastes and preferences are relatively con-
stant.
Consumer expectations about future prices,
income and availability: If a consumer be-
lieves that the price of the good will be higher
in the future, he/she is more likely to purchase
the good now. If the consumer expects that
his/her income will be higher in the future, the
consumer may buy the good now. Availability
(supply side) as well as predicted or expected
availability also aects both price and demand.
Population: If the population grows this
means that demand will also increase.
Nature of the good: If the good is a basic
commodity, it will lead to a higher demand
This list is not exhaustive. All facts and circum-
stances that a buyer nds relevant to his willingness
or ability to buy goods can aect demand. For ex-
ample, a person caught in an unexpected storm is
more likely to buy an umbrella than if the weather
were bright and sunny.
2 Demand function and equation
The demand equation is the mathematical expression of
the relationship between the quantity of a good demanded
and those factors that aect the willingness and ability of
a consumer to buy the good. For example, Q = f(P; P ,
Y) is a demand equation where Q is the quantity of a
good demanded, P is the price of the good, P is the price
of a related good, and Y is income; the function on the
right side of the equation is called the demand function.
2 5 MARKET STRUCTURE AND THE DEMAND CURVE

The semi-colon in the list of arguments in the demand 4 Price elasticity of demand (PED)
function means that the variables to the right are being
held constant as one plots the demand curve in (quantity, Main article: Price elasticity of demand
price) space. A simple example of a demand equation is
Q = 325 - P - 30P + 1.4Y. Here 325 is the repository
of all relevant non-specied factors that aect demand PED is a measure of the sensitivity of the quantity vari-
for the product. P is the price of the good. The coe- able, Q, to changes in the price variable, P. Elasticity
cient is negative in accordance with the law of demand. answers the question of the percent by which the quan-
The related good may be either a complement or a substi- tity demanded will change relative to (divided by) a given
tute. If a complement, the coecient of its price would percentage change in the price. For innitesimal changes
be negative as in this example. If a substitute, the coef- the formula for calculating PED is the absolute value of
cient of its price would be positive. Income, Y, has a (Q/P)(P/Q).
positive coecient indicating that the good is a normal
good. If the coecient was negative the good in question
would be an inferior good meaning that the demand for 4.1 Determinants of PED
the good would fall as the consumers income increased.
Specifying values for the non price determinants, P = The overriding factor in determining PED is the willing-
4.00 and Y = 50, results in the demand equation Q = 325 ness and ability of consumers after a price changes to
- P - 30(4) +1.4(50) or Q = 275 - P. If income were to in- postpone immediate consumption decisions concerning
crease to 55 the new demand equation would be Q = 282 the good and to search for substitutes (wait and look).
- P. Graphically this change in a non price determinant
of demand would be reected in an outward shift of the
demand function caused by a change in the x intercept.
4.2 Elasticity along linear demand curve
The slope of a linear demand curve is constant. The
elasticity of demand changes continuously as one moves
down the demand curve because the ratio of price to
quantity continuously falls. At the point the demand
3 Demand curve curve intersects the y-axis PED is innitely elastic, be-
cause the variable Q appearing in the denominator of the
Main article: Demand curve elasticity formula is zero there. At the point the demand
In economics, the demand curve is the graph depicting curve intersects the x-axis PED is zero, because the vari-
able P appearing in the numerator of the elasticity for-
mula is zero there.[2] At one point on the demand curve
PED is unitary elastic: PED equals one. Above the point
of unitary elasticity is the elastic range of the demand
curve (meaning that the elasticity is greater than one).
Below is the inelastic range, in which the elasticity is less
than one. The decline in elasticity as one moves down the
curve is due to the falling P/Q ratio.

4.3 Constant price elasticity demand

Q = aP c where a and c are parameters, and the constant
price elasticity is c and c 0 .

5 Market structure and the de-

mand curve
In perfectly competitive markets the demand curve, the
Here, DD' is demand curve. average revenue curve, and the marginal revenue curve all
coincide and are horizontal at the market-given price.[3]
The demand curve is perfectly elastic and coincides with
the relationship between the price of a certain commodity the average and marginal revenue curves. Economic ac-
and the amount of it that consumers are willing and able tors are price-takers. Perfectly competitive rms have
to purchase at that given price. zero market power; that is, they have no ability to aect
 3

the terms and conditions of exchange. A perfectly com- ganizations, So(p): Dr(p) = D(p) - So(p )[6]
petitive rms decisions are limited to whether to produce
and if so, how much. In less than perfectly competitive
markets the demand curve is negatively sloped and there
is a separate marginal revenue curve. A rm in a less
than perfectly competitive market is a price-setter. The
8 Is the demand curve for PC rm
rm can decide how much to produce or what price to really at?
charge. In deciding one variable the rm is necessarily
determining the other variable
Practically every introductory microeconomics text de-
scribes the demand curve facing a perfectly competitive
rm as being at or horizontal. A horizontal demand
6 Inverse demand function curve is perfectly elastic. If there are n identical rms
in the market then the elasticity of demand PED facing
Main article: Inverse demand function any one rm is

In its standard form a linear demand equation is Q = a - PED = nPED - (n - 1) PES

bP. That is, quantity demanded is a function of price. The
inverse demand equation, or price equation, treats price as
a function g of quantity demanded: P = f(Q). To compute where PED is the market elasticity of demand, PES is
the inverse demand equation, simply solve for P from the the elasticity of supply of each of the other rms, and (n
demand equation.[4] For example, if the demand equation 1) is the number of other rms. This formula suggests
is Q = 240 - 2P then the inverse demand equation would two things. The demand curve is not perfectly elastic and
be P = 120 - .5Q, the right side of which is the inverse if there are a large number of rms in the industry the
demand function.[5] elasticity of demand for any individual rm will be ex-
The inverse demand function is useful in deriving the to- tremely high and the demand curve facing the rm will
[6]
tal and marginal revenue functions. Total revenue equals be nearly at.
price, P, times quantity, Q, or TR = PQ. Multiply the For example assume that there are 80 rms in the industry
inverse demand function by Q to derive the total revenue and that the demand elasticity for industry is 1.0 and the
function: TR = (120 - .5Q) Q = 120Q - 0.5Q. The price elasticity of supply is 3. Then
marginal revenue function is the rst derivative of the to-
tal revenue function; here MR = 120 - Q. Note that the
MR function has the same y-intercept as the inverse de- PED = (80 x (1)) - (79 x 3) =
mand function in this linear example; the x-intercept of 80 - 237 = 317
the MR function is one-half the value of that of the de-
mand function, and the slope of the MR function is twice
that of the inverse demand function. This relationship That is the rm PED is 317 times as elastic as the market
holds true for all linear demand equations. The impor- PED. If a rm raised its price by one tenth of one percent
tance of being able to quickly calculate MR is that the demand would drop by nearly one third.[6] if the rm
prot-maximizing condition for rms regardless of mar- raised its price by three tenths of one percent the quantity
ket structure is to produce where marginal revenue equals demanded would drop by nearly 100%. Three tenths of
marginal cost (MC). To derive MC the rst derivative of one percent marks the eective range of pricing power the
the total cost function is taken. For example, assume cost, rm has because any attempt to raise prices by a higher
C, equals 420 + 60Q + Q2 . Then MC = 60 + 2Q. Equating percentage will eectively reduce quantity demanded to
MR to MC and solving for Q gives Q = 20. So 20 is the zero.
prot maximizing quantity: to nd the prot-maximizing
price simply plug the value of Q into the inverse demand
equation and solve for P.

9 Demand management in eco-

7 Residual demand curve nomics

The demand curve facing a particular rm is called the
residual demand curve. The residual demand curve is the
market demand that is not met by other rms in the in-
dustry at a given price. The residual demand curve is the
market demand curve D(p), minus the supply of other or-
Demand management in economics is the art or science
of controlling economic or aggregate demand to avoid a
recession. Such management is inspired by Keynesian
macroeconomics, and Keynesian economics is sometimes
referred to as demand-side economics.
4 13 SEE ALSO

10 Dierent types of goods de- tuate randomly, therefore, they should be followed on a
daily, weekly or a monthly basis.
mand
Negative demand: If the market response to a product 11 Criticism
is negative, it shows that people are not aware of the fea-
tures of the service and the benets oered. Under such
circumstances, the marketing unit of a service rm has E. F. Schumacher challenges the prevailing economic as-
to understand the psyche of the potential buyers and nd sumption that fullling demand is the purpose of eco-
out the prime reason for the rejection of the service. For nomic activity, oering a framework of what he calls
example: if passengers refuse a bus conductors call to "Buddhist economics" in which wise demands, fullling
board the bus. The service rm has to come up with an genuine human needs, are distinguished from unwise de-
appropriate strategy to remove the misunderstandings of mands, arising from the ve intellectual impairments rec-
the potential buyers. A strategy needs to be designed to ognized by Buddhism:[7]
transform the negative demand into a positive demand.
The cultivation and expansion of needs is
No demand: If people are unaware, have insucient in-
the antithesis of wisdom. It is also the an-
formation about a service or due to the consumers indif-
tithesis of freedom and peace. Every increase
ference this type of a demand situation could occur. The
of needs tends to increase ones dependence
marketing unit of the rm should focus on promotional
on outside forces over which one cannot have
campaigns and communicating reasons for potential cus-
control, and therefore increases existential fear.
tomers to use the rms services. Service dierentiation
Only by a reduction of needs can one promote
is one of the popular strategies used to compete in a no
a genuine reduction in those tensions which are
demand situation in the market.
the ultimate causes of strife and war.[8]
Latent demand: At any given time it is impossible to
have a set of services that oer total satisfaction to all the
needs and wants of society. In the market there exists 12 Demand reduction
a gap between desirables and the availables. There is al-
ways a search on for better and newer oers to ll the gap
between desirability and availability. Latent demand is a 12.1 In psychopharmacology
phenomenon of any economy at any given time, it should
be looked upon as a business opportunity by service rms Main article: Demand reduction
and they should orient themselves to identify and exploit
such opportunities at the right time. For example, a pas- Demand reduction refers to eorts aimed at reducing the
senger traveling in an ordinary bus dreams of traveling in public desire for illegal and illicit drugs. The drug policy
a luxury bus. Therefore, latent demand is nothing but the is in contrast to the reduction of drug supply, but the two
gap between desirability and availability. policies are often implemented together.
Seasonal demand:Some services do not have an all year
round demand, they might be required only at a certain
period of time. Seasons all over the world are very di-
12.2 In energy conservation
verse. Seasonal demands create many problems to service
Main article: Energy demand management
organizations, such as:- idling the capacity, xed cost and
excess expenditure on marketing and promotions. Strate-
gies used by rms to overcome this hurdle are like - to Energy demand management, also known as demand-side
nurture the service consumption habit of customers so as management (DSM) or demand-side response (DSR), is
to make the demand unseasonal, or other than that rms the modication of consumer demand for energy through
recognize markets elsewhere in the world during the o- various methods such as nancial incentives and behav-
season period. Hence, this presents and opportunity to ioral change through education.
target dierent markets with the appropriate season in
dierent parts of the world. For example, the need for
Christmas cards comes around once a year. Or the, sea- 13 See also
sonal fruits in a country.
Demand patterns need to be studied in dierent segments Consumption
of the market. Service organizations need to constantly
study changing demands related to there service oer- Demand chain
ings over various time periods. They have to develop a Demand curve
system to chart these demand uctuations, which helps
them in predicting the demand cycles. Demands do uc- Demand-led growth
 5

Demand schedule

Derived demand
Law of demand

Law of supply
Planned obsolescence

Supply (economics)
Supply-side economics

Supply and demand

Utility

14 Notes
[1] O'Sullivan, Arthur; Sherin, Steven M. (2003). Eco-
nomics: Principles in Action. Upper Saddle River, New
Jersey: Pearson Prentice Hall. p. 79. ISBN 0-13-063085-
3.

[2] Colander, David C. Microeconomics 7th ed. pp. 132

133. McGraw-Hill 2008.

[3] The perfectly competitive rms demand curve is not in

fact at. However, if there are numerous rms in the in-
dustry the demand curve of an individual rm is likely to
be extremely elastic, for a discussion of residual demand
curves see Perlo (2008) at pp. 245246.

[4] The form of the inverse linear demand equation is P = a/b

- 1/bQ.

[5] Samuelson, W & Marks, S. Managerial Economics 4th ed.

p. 37. Wiley 2003.

[6] Perlo, Jerey M. (2008). Microeconomics. pp. 243

246.

[7] E. F. Schumacher, Buddhist Economics, in Asia: A

Handbook, Guy Wint, ed., (London: 1966).

[8] E. F. Schumacher, Small is Beautiful (1973), p. 31.

15 Further reading
Friedman, Milton (December 1949). The Mar-
shallian Demand Curve. Journal of Political Econ-
omy. 57 (6): 463. doi:10.1086/256879. JSTOR
1826553.

16 External links
Consumer Demand

Shift in Aggregate Demand and Supply curve

6 17 TEXT AND IMAGE SOURCES, CONTRIBUTORS, AND LICENSES

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Akerans, Alan m, Bamyers99, Dreispt, MonoAV, Hang Li Po, Pun, Mdamascus, GrayFullbuster, Petrb, ClueBot NG, W.Kaleem,
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