Demand function

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Demand function is what describes a relationship between one variable and its determinants. It describes how much quantity of goods is purchased at alternative prices of good and related goods, alternative income levels, and alternative values of other variables affecting demand.

The principal variables that influence the quantity demanded of a good or service are (1) the price of the good or service,

(2) the incomes of consumers,

(3) the prices of related goods and services,

(4) the tastes or preference patterns of consumers,

(5) the expected price of the product in future periods, and

(6) the number of consumers in the market.

The relation between quantity demanded and these above factors is referred to as the general demand function and is expressed as follows:

Demand function may be presented as mathematical expression stating relationship between quality demanded of the commodity and its determinants is known as the demand function. Explained below.

Qx = Quantity Demanded of product , per period
Px = Price of Product
Ax = Advertising for Product
Dx = Design/style/quality-Cost of product
Ox = Outlets, Distribution
Ic = Incomes of consumers/customers/clientele
Yc = Consumer Expenditures on related goods

Demand Analysis

Elasticity of Demand

Tc = Tastes
Ec = Expectations of consumers regarding future prices
Py = Prices of related goods
Ay = Advertising/Promotion of related goods
Dy = Design/Styles of related goods
Oy = Outlets of related goods
G = Government Policy
N = Number of People in the Economy
W = Weather Conditions

REASONS FOR CHANGE (INCREASE OR DECREASE) IN DEMAND

Changes in income
Changes in tastes, habits and preference.
Changes in fashions and customs.
Changes in the distribution of wealth.
Changes in population.
Advertisement and publicity.
Change in the value of money (if money value increases that leads to raise in demand for goods).

DETERMINANTS OF DEMAND

The demand for a commodity by a buyer is generally not a fixed quantity. It is affected by many factors. The factors that influence the demand are called the determinants of demands. The determinants of demand are also known as demand shifters. The following factors affect an individual's demand for a commodity:

1. Prices of related commodities

When a change in price of the other commodity leaves the amount demanded of the commodity under consideration unchanged, we say that the two commodities are unrelated, otherwise these are related. The related commodities are of two types’ substitutes and complements. When the price of one commodity and the quantity demanded of the other commodity move in the same direction (i.e., both increase together and decrease together).

2. Income of the individual

The amount demanded of a commodity also depends upon the income of an individual. With an increase in income, increased amount of most of the commodities in his consumption bundle, though the extent of the increase may differ between commodities.

3. Tastes and preferences

It is quite well that the change in tastes and preferences of consumers in favor of a commodity results in smaller demand for the commodity. Modern business firms, which sell product with different brand names, rely a great deal on influencing tastes and preferences of households in favor of their products (with the help of advertisements, etc.) in order to bring about increase in demand of their products.

4. Tastes of the consumers

The amount demanded also depends on consumer’s taste. Tastes include fashion, habit, customs, etc. A consumer’s taste is also affected by advertisement. If the taste for a commodity goes up, its amount demanded is more even at the same price and vice-versa.

5. Wealth

The amount demanded of a commodity is also affected by the amount of wealth as well as its distribution. The wealthier are the people, higher is the demand for normal commodities. If wealth is more equally distributed, the demand for necessaries and comforts is more. On the other hand, if some people are rich, while the majority is poor, the demand for luxuries is generally less.

6. Expectations regarding the future

If consumers expect changes in price of a commodity in future, they will change the demand at present even when the present price remains the same. Similarly, if consumers expect their incomes to rise in the near future, they may increase the demand for a commodity just now.

7. Climate and weather

The climate of an area and the weather prevailing there has a decisive effect on consumer’s demand. In cold areas, woolen cloth is demanded. During hot summer days, ice is very much in demand. On a rainy day, ice-cream is not so much demanded.

8. State of business

The level of demand for different commodities also depends upon the business conditions in the country. If the country is passing through boom conditions, there will be a marked increase in demand. On the other hand, the level of demand goes down during depression.

Example

Factors affecting demand of Coca Cola

Price of relative goods:

Demand for coca cola is also influenced by the change in price of relative goods. In case of coca cola there are number of substitute goods available in the market, we have Pepsi, Miranda, limca, spirit, etc. now if the price of coca cola increases from Rs 12 to Rs 20 whereas the price of other aerated drinks remain the same then the demand for coca cola will fall down.

INCOME OF THE CONSUMER

There is a direct relationship between income of consumer and demand. Now coca cola being a normal good, if there’s an increase in income, the demand will increase and vice versa.

TASTE AND PREFERENCES

Taste and preferences of the consumers also influence the demand to greater extent. In case of coca cola, if there are hard core consumers who prefer the taste of coca cola, even if the price of coca cola increases, the demand will remain the same. But if the consumers have no taste or preference of coca cola, then if the price increases the demand decreases.

GOVERNMENT POLICIES

As the study shows, there was a steep reduction in the demand of coca cola when the pesticides were found in few samples of coca cola. As a result consumer was shifting from coca cola to other natural drinks so therefore the demand for coca cola decreased.

TIME

Time is an important factor that affects the demand of coca cola e.g. the demand for coca cola goes up during festive seasons and during summers.

AGE GROUP OF THE POPULATION

This product is meant for the children, adults and also for the old people so the age groups are not much affected the demand of the product so demand remain same and by the increase in the population, the demand of the product also increases.

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