Meaning of Demand and the Demand Function

Every Andhra Pradesh Intermediate first-year Economics student begins the study of microeconomics with this chapter, because 'demand' is used far more precisely in economics than in everyday speech.

In everyday language 'demand' and 'desire' are used loosely, but economics draws a sharp line between them. A desire is simply a wish to own or use a commodity; it becomes demand only when it is backed by (i) the willingness to pay for the commodity and (ii) the ability to pay for it, at a stated price and over a stated period of time. Wanting a car is a desire; being able and willing to buy it at today's price is demand. This is why demand is always expressed at a given price and per unit of time (per day, per month, per year) — 'demand for rice' means nothing until we say at what price and over what period.

Demand can be studied at two levels: individual demand (the quantity one buyer is willing and able to buy) and market demand (the sum of individual demands of all buyers of that commodity in the market at each price).

Determinants of demand. The quantity demanded of a commodity does not depend on its own price alone — several factors act together. This is captured by the demand function:

where $P_x$ is the price of the commodity itself, $P_r$ the price of related goods (substitutes and complements), $Y$ the consumer's income, $T$ tastes and preferences, $E$ expectations about future prices, and $N$ the number of buyers in the market. When economists study the pure effect of a good's own price on the quantity demanded, every other determinant in this list is held constant — the familiar Latin tag for this is ceteris paribus ('other things remaining the same'). It is exactly this isolated own-price relationship that the demand schedule and the demand curve, covered next, represent.