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What is Demand? Explain the Law of Demand

Demand
Whenever you go to the market, you see many goods and services. But we know by experience that everything you desire is not purchased. There may be some goods which you want to buy, but you may not be able to afford them. There may be some goods that you are able to afford, but still not buy them may be because you are not willing to buy at that price or don’t have a liking for that good. However, there will be some goods for which you are able and willing to buy the good at the given prices. In this case, we say that you are demanding a good.

Therefore, we say that demand for a good arises when the consumer is able and willing to buy a good at given price.  Demand for a good is always indicated with reference to its price.

As we know, economics studies how people make decisions or choices in order to meet their needs with their limited resources, the Theory of Demand is one such theory analysing the behaviour of consumers when deciding the amount of goods and services to buy.

What is the difference between Demand and Quantity Demanded?

We know that demand is shown with reference to price. But it can be expressed in two different ways- Demand and Quantity demanded

When we say demand, we are basically referring to the different possible quantities purchased at different level of prices. Whereas, quantity demanded is the specific quantity of good bought with reference to a specific price of that good. Example: Let us take a consumer and the quantity of a particular good say X. The consumer buys 7 units of X at a price 3, 6 units at price 4, 5 units at price 5 and 4 units at price 6.

In this case the set of different quantities that a consumer buys at different prices is referred to as demand which is 7 units of X at a price 3, 6 units at price 4 and so on. Quantity demanded are the unit bought at a specific price say 4 units at price 6.

Demand Schedule

The demand of a good can be expressed in a table showing the different units bought at different prices, which is known as the demand schedule. The above example when expressed in a table can be shown as

Price of a Good X

Quantity Demanded of a good X

3

7

4

6

5

5

6

4

The above table shows a schedule of different prices of a good x and the quantity demanded at those prices, representing what is called a demand schedule. 

The above table shows the demand schedule of a single consumer. However, in a market there are numerous consumers, whose demand schedule can be found out. If we add or sum up the demand schedules of all individual consumers, we get the market demand schedule.

Price of a Good x

Quantity Demanded of a good X by 1st consumer

Quantity Demanded of a good X by 2st consumer

Total Market Demand (Sum of Quantity Demanded of Consumer 1 and 2)

3

7

8

15

4

6

7

13

5

5

6

11

6

4

5

9

From the above table, it can be seen that the total market demand is the sum of individual demand schedules of both the consumers.

Individual Demand and Market Demand

The demand for a good can be from a single consumer or many consumers, so we can express demand as Individual demand or Market Demand

Individual Demand Curve

Individual Demand refers to the demand of an individual consumer of a commodity in a market. It is measured by indicating the different amounts of quantity that individual buyer will buy at different level of prices. The curve which we get after plotting the quantity demanded and price of that individual buyer is called Individual Demand Curve.

Demand Curve

Market Demand Curve

We know a market doesn’t consist of a single buyer but a number of buyers. When we add up the individual demand of all these buyers, we get market demand. In other words, we sum up all the individual demand curves and get the market demand curve. Market demand is important to measure because when we analyse the different market structures or the effect of a change in price and other determinants of demand, we use market demand.

Market Demand Curve
In the above diagram D1 is the demand curve of one buyer and D2 is the demand curve of the second buyer. Horizontally summing up the two individual demand curves, we get the market demand curve. Each point on the market demand curve is the sum of individual demand schedule. 

LAW OF DEMAND

Let us say a consumer is deciding to buy a particular good, say a chocolate. Now, on what factors will his/her purchasing depend. It may depend on a lot of factors such as price of that good, income of the consumer, his/her tastes and preferences, price of the related good.

Among the various factors effecting demand, price of the good is one of the most important factors determining how much quantity a consumer will buy. If a consumer is rational, he/she would prefer to buy more when the price decreases and buy less when the price increases. Thus, when the Price of a good rises, its quantity demanded falls and when the price decreases, the quantity demanded increases, taking the other determinants of demand to constant.  This leads us to the famous Law of Demand which states that other factors remaining constant, there exists an inverse relationship between the Price of a good and its Quantity Demanded. With a rise in price, quantity demanded falls and with a fall in Price the quantity demanded rises.

Law of Demand

The above function shows that other things remaining the same, demand for a good X is a function of its Price. It is an inverse function of price. The other factors which are kept constant here are Income of the consumer (Y), Price of a related good (Pr), Taste and Preferences of the consumer (T) and Future Expectations of the consumer regarding price of the good (E). 
Diagrammatically, the Law of Demand can be shown as
The diagram shows that, when the price of the good X is Rs. 3, the quantity demanded is 7 units. When the price rises to Rs. 4, the quantity demanded is 6 units. A rise in price leads to a fall in quantity demanded. A rise in price till Rs. 6, leads to a fall in quantity demanded to 4 units. 

Key Points
  • Demand for a good arises when the consumer is able and willing to buy a good at given price.
  • Individual Demand refers to the demand of an individual consumer of a commodity in a market.
  • Adding up all the individual demand curves, gives the market demand curve.
  • Law of Demand states that other factors remaining constant, there exists an inverse relationship between the Price of a good and its Quantity Demanded. With a rise in price, quantity demanded falls and with a fall in Price the quantity demanded rises.

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