Relationship Between Demand of a Commodity and Its Price

The Demand Function:

The quantity of each commodity that is demanded by an individual household is affected by five main variables:

1. The price of the commodity
2. The prices of other commodities
3. The income of the household
4. Various ‘sociological’ factors, and
5. The tastes and preference of the house hold.

The above list can be conveniently summa¬rised in, what is called, a demand function. The demand function is a mathematical expression of the relation between the quantity demanded of a commodity and its various determinate—several variables listed above. The form of the function determines the sign and the magni¬tude of that dependence.
If we hold all other variables constant, the quantity demanded of a commodity will vary universally with its price. Since this relation holds true in case of almost all the commo¬dities that we buy, this is known as the Law of Demand.

The demand curve in Fig. 3.1 illustrates the Law of Demand which states that the quantity demanded of a commodity increase when its price falls. The converse is also true the quantity demanded falls when the price rises. Thus there is a negative (inverse) relation between price and quantity. They move in opposite directions. If one increases, the other falls.

1. Law of Diminishing Margined Utility:

The purchase of a commodity has to take place with a sacrifice. The sacrifice is calculated by the price paid. The consumer will never pay for a commodity more than the money value of its marginal utility to him. But the larger the amount of a ‘ commodity purchased, the less is the marginal utility. Therefore, the consumer will not buy a large quantity unless the price is low.

2. Income effect:

The fall in the price of a commodity is equivalent to an increase in the income of the consumer because now he has to spend less on purchasing the same quantity as before. A part of the money, so gained, can be used for purchasing some more units of the commodity. Therefore, when the price falls the amount purchased increases. When price rises, the consumer’s income is, in effect, reduced and he has to curtail his expenditure on the commodity. So the amount purchased falls.

3. Substitution effect:

When the price of a commodity falls it will be substituted for costlier things because thereby the consumer will gain. If the price of coffee falls it will be used by some people in place of other beverages to some extent. Conversely, when the price of a commodity rises, other commo¬dities will be used in its place to some extent at least. Therefore, a fall in the price of a commodity increases demand and a rise in its price reduces demand.

4. Change in the number of buyers:

When the price of a commodity falls some people, who were formerly unable to buy it, would be able to do so. “Lowering price brings in new buyers” (Samuelson). Therefore, the total demand will rise. Conversely, when the price of a commodity rises, some people will find it impossible to buy it and will go out of the market.

5. Change in the number of uses:

When the price of a commodity falls it is used for various uses. For example, when the price of mango falls it is used not only for more consumption and also for preparing chutney. Similarly, when the price rises, the uses of the commodity are restricted.

Assumptions of the Law of Demand:

The Law of Demand is based upon the following assumptions:

1. The habits and tastes of the demanders remain unchanged:

The amount of a commo¬dity which a person consumes depends on his taste and habits. If they change, the amount consumed will also change. When a commo¬dity becomes fashionable its consumption will increase, irrespective of price changes. The demand curve is drawn on the basis of a particular level of habits and tastes. When tastes and habits change, the demand curve has to be redrawn. But, at the new level, the curve will have a downward slope.

2. The income remains the same:

When income changes the consumer’s scale of choices usually becomes entirely different. He may purchase more of a commodity at the same price. On the other hand, if the commodity concerned is an inferior good, he may replace it by a better variety. Hence his demand curve has to be redrawn when his income is changed.

3. The prices of other goods remain the same:

A change in the prices of substitutes and complementary goods may cause demand to shift. The demand for tea will be affected if the price of coffee falls or if sugar is scarce.
In the cases noted above, an increase in price leads to greater demand and a fall in price leads to less demand. The demand curve in such cases slopes upwards from left to right. Demand curves of this type are very exceptional. Sometimes the demand curve may slope upwards for a short range and then slope downwards again. These effects can be called perverse demand relations.

Other factors (O) {displaystyle Q_{dN}=f(O)}Size and regional distribution of population:

A rise in population leads to an increase in the number of consumers. As a result demand, increases. The greater the number of consumers, the greater the market demand for a commodity. Therefore, demand for a commodity is directly related to the size of the population.

Regional distribution of a population also affects the demand.

The composition of the population:

If there are more children, demand for goods like toys, biscuits, sweets, etc will increase.
Similarly, if there are more old people, the demand for goods like glasses, canes, hearing aids, medicines, dentures and so on will increase.
The predominance of young people in the population will raise demand for goods like mobile phones, clothes, hair gels and other related products.

Distribution of income:

Equitable distribution of income leads to an increase in demand and unequal distribution of income leads to a decrease in demand.

Weather and climatic conditions:

Changes in weather conditions also influence demand for a product. For example, a sudden rainfall on a hot summer day brings down the demand for ice cream and cold drinks.

Taxation:

Higher taxes imposed on a commodity will lower the demand for that commodity, and vice versa.

Technical progress (inventions and innovations):

It leads to the production of new attractive quality products at fair prices. Latest LCD, 3G, etc.

Advertisement effects:

Preferences of customers can be affected by advertisement and publicity, leading to greater demand for a product.