Chapter – 1: Concept of Demand – I Or

Or

Give the relationship between individual and market demand functions.

Ans. – Demand for a commodity is defined as the quantity of the commodity the consumers purchase at a given price and given time.

Individual demand refers to the quantity of a commodity demanded by one consumer. The determinants of individual demand are as follows:

I. Price of the product $$\left ( P_{n} \right ),$$ say $$n$$ is the good.

II. Price of other product $$\left ( P_{n} \right ),i = 1… n-1.$$

III. Consumer’s income and wealth (Y).

IV. Consumer’s tastes and preferences (T).

V. Various sociological factors (s).

VI. Exogenous factors such as weather (E).

We can summarise the above determinants of demand in an equation/functional form called Demand function of the consumer in the following manner:

${Q_d} = {f_1}\left( {{P_n},{P_1},…,{P_{n – 1}},S,Y,T,E} \right)$

Where $${Q_d}$$ stands for quantity demanded, $${f_1}$$ is the function. The terms $${{P_n},{P_1},…,{P_{n – 1}},S,Y,T,E}$$ are already given above.

Individual Demand Curve: An individual’s demand curve is drawn by using his/her demand schedule which is one way of showing the relationship between quantity demanded and price of the commodity. A hypothetical demand schedule is given below for an individual A:

Demand Schedule of Good $$x$$
Price (₹)
Quantity (kg./month)
5
20
8
16
10
12

Law of Demand and Demand Curve: The demand schedule given above follows the law of demand. The Law states “other things being equal, a rise in price leads to fall in quantity demanded of the commodity and vice versa.” A demand curve is the graphic representation of the law of demand showing an inverse relationship between price measured along the vertical axis and quantity of the commodity which is measured along the horizontal axis as shown in the Diagram. As given in the Diagram, the individual demand curve $$d$$ is a downward sloping curve indicating an inverse relationship between price and quantity demanded of the commodity.

Market Demand: Market demand of commodity refers to the total demand of the same commodity by all the consumers in the market. The determinants of market demand are given as under:

(I) All the determinants of individual demand given above $$\left ( P_{n,} P_{1…,}P_{n-1,}Y,S,T,E\right )$$

(II) Distribution of income in the society (D).

(III) Total number of households consuming the product (H).

$Q_{D} = f_{2} \left ( P_{n},P_{1},…,P_{n-1},Y,S,T,D,H \right )$

where $$Q_{d}$$ is the market demand of the good and $$f_{2}$$  is the function Market demand curve is derived by horizontal summation of individual demand curves of all consumers in the market. Horizontal summation implies adding up the quantities demanded by all households/consumers at a given price in the market as given in the table below by taking three individuals A, B and C.

Market Demand Schedule from Individual Demand Schedule
Price (₹)
Quantity Demanded by individuals
Quantity Demanded in the Market
A
B
C
5
20
15
18
53
10
12
9
10
31
15
8
5
7
20

The diagram below gives the derivation of the market demand curve from the above schedule. Market demand for the good is D which is a horizontal summation of $$d_{A,}d_{B}$$ and $$d_{C}$$ the given prices as given in the schedule