Meaning of Demand and Its Determinants

In everyday speech "demand" simply means a desire for something. In business economics the word is far stricter. Demand for a commodity means the quantity of that commodity a consumer is willing to buy, is able to pay for, and is prepared to buy at a given price during a given period of time. A mere wish to own a car is not demand; a wish backed by purchasing power and expressed at a stated price is. Three elements are therefore essential in any statement of demand — a price, a quantity, and a period of time. To say "the demand for rice is 50 kg" is meaningless unless we add "at ₹40 per kg per month".

The quantity a consumer demands does not depend on price alone. It is governed by several forces together, summarised in the demand function:

where $Q_{dx}$ is the quantity demanded of good $x$, $P_x$ its own price, $P_r$ the price of related goods, $Y$ the consumer's income, $T$ tastes and preferences, $E$ price expectations and $N$ the number of buyers in the market. The chief determinants of demand are:

• Price of the commodity ($P_x$) — normally the most important; a rise in own price reduces quantity demanded and a fall raises it.
• Prices of related goods ($P_r$) — for substitutes (tea and coffee) a rise in the price of one raises demand for the other; for complements (car and petrol) a rise in the price of one lowers demand for the other.
• Income of the consumer ($Y$) — for normal goods demand rises with income; for inferior goods (coarse cereals, low-grade cloth) demand falls as income rises because the consumer switches to superior substitutes.
• Tastes, habits and fashion ($T$) — a good that becomes fashionable enjoys higher demand; one that goes out of fashion loses it.
• Expectations about future prices ($E$) — if buyers expect prices to rise shortly, current demand rises as they buy in advance, and vice versa.
• Number of buyers / size of population ($N$) — a larger market means larger total demand.

When we study how quantity demanded responds to own price alone, we hold all the other determinants ($P_r, Y, T, E, N$) constant — the assumption economists call ceteris paribus ("other things remaining equal"). This isolation of one cause at a time is what makes the Law of Demand possible.