Market demand for a commodity is a sum of all the individuals’ demands for the commodity at a given price per unit of time. Suppose there are only 3 consumers A, B and C of Pepsi and their weekly individual demand for Pepsi at its different prices is given as in table. The last column of the table shows the market demand as derived from the aggregate of individual demands for Pepsi.
| Price (in Rs) |
No. of Pepsi Cans Demanded by |
Market Demand = A + B + C |
| A |
B |
C |
| 12 |
0 |
0 |
0 |
0 |
| 10 |
0 |
0 |
4 |
4 |
| 8 |
0 |
4 |
8 |
12 |
| 6 |
3 |
8 |
12 |
23 |
| 4 |
5 |
12 |
16 |
33 |
| 2 |
8 |
16 |
20 |
44 |
| 0 |
11 |
20 |
24 |
55 |
The last column of table shows weekly market demand for Pepsi. The market demand curve can be obtained by plotting the data in the last column of the table.
Graphical Derivation : Alternatively, market demand curve can be derived graphically by horizontal summation of the individual demand curve at each price of Pepsi. Graphical derivation of the market demand curve is illustrated in the figure given below. The individual demand curves of buyers A, B and C are shown by the demand curves DA, DB and DC respectively. Horizontal summation of these demand curves produces weekly market demand curve for Pepsi as shown by the curve DM.
Thus, a market curve is horizontal summation of individual demand curves at different prices.
Some important determinants of market demand are as given below :
(i) Price of Substitutes and Complementary Goods : The demand for a commodity depends also on the prices of its substitute and complementary goods. Two commodities are considered as substitutes for one another, if change in price of one affects the demand for the other in the same direction. For example, commodity X and Y are in economic sense substitute for one another if a rise in the price of X increases the demand for Y and vice-versa. Commodity is deemed to be a complement of another when it encourages the use of the other. For example, petrol is a complement to motor vehicles; butter and jam are complements to bread; milk and sugar are compliments to tea and coffee and so on.
(ii) Consumer’s Income and Engle Curves : Consumer’s income is a fundamental determinant of the quantity demanded of a product. It is common belief that the people with the higher disposable income spend huge amounts on goods and services compared to low-income people. Income-demand relationship between demand and its other determinants is of another diverse nature. For the purpose of goods and services of income-demand analysis, it can be grouped under four broad categories, such as:
(a) Essential Consumer Goods : The goods and services in this category are essentially consumed by almost all persons of a society, e.g., food, grains, clothes, vegetable oils, sugars, matches, cooking fuel and housing, etc.
(b) Inferior Goods : Inferior and superior goods are commonly known to both consumers and sellers.
(c) Normal Goods : In economics sense, normal goods are those which are demanded in increasing quantities as consumers’ income rises.
(d) Prestigious Goods : Prestigious goods are those which are consumed mostly by the rich section of the society, e.g. precious stones, studded jewellery, costly cosmetics, luxury cars, air conditioners, costly decorations, etc.
(iii) Consumer’s Taste and Preferences : When there is a change in consumers’ interest, taste and preferences for certain goods and services following the change in fashion, people switch their consumption pattern from cheaper and old fashioned goods over to costlier ‘mod’ goods, so long as price differentials commensurate with their preferences.
(iv) Expected Utility at Equilibrium : A consumer maximizes his total satisfaction or his total utility when marginal utility per unit of expenditure derived from each commodity is the same.
(v) Consumer’s Expectations : If consumers expect a rise in the price of a commodity, they would buy more of it at its current price, with a view to avoiding the pinch of price rise in future. On the contrary, if consumers expect prices of certain goods to fall, they postpone their purchases of such goods with a view to taking advantage of lower prices in future, mainly in case -of non-essential goods. This behaviour of consumers reduces (or increases) the demand in future. Similarly, an expected increase in income on account of the announcement of revision of pay-scales, dearness allowance, bonus, etc. induces increase in current purchase and vice-versa.
(vi) Demonstration Effect : When new commodities or new models of existing ones appear in the market, rich people buy them first. Some people buy new goods or new model of goods because they have genuine need for them, while others buy because they want to exhibit their affluence. But once new commodities come in vogue, many households buy them, not because they have a genuine need for them, but because others or neighbours have bought these goods. Purchase made on account of these variables are the result of ‘demonstration effect’ or the ‘bandwagon effect.’ These effects have a positive effect on the demand.
(vii)Consumer Credit Facility : Availability of credit to the consumers from the sellers, banks, relations and friends or from any other source, encourages the consumers to buy more than that what they would buy in the partial or complete absence of such credit. Credit facility affects mostly the demand for consumer durables, particularly those which require bulk payment at the time of purchase.
(viii) Population of the Country : The total domestic demand for a product depends also on the size of population. Given the price, per capita income, taste and preferences etc. the larger the population, the larger the demand for a product of common use. With an increase (or decrease) in the size of population, employment percentage remaining the same, demand for the product increases (or decreases). The relation between market demand for a product (normal) and the size of population is similar to the income-demand relationship.
(ix) Distribution of National income : The distribution pattern of national income also affects the demand for a commodity. If national income is evenly distributed, market demand for normal goods will be the largest. If national income is unevenly distributed, i.e., if majority of population belongs to the lower income groups, market demand for essential goods will be the largest, whereas the same for other kinds of goods will be relatively low.
