Market Demand: Determinants of Market Demand, The Market Demand Equation

What is Market Demand?

Meaning of Market Demand: – Market Demand refers to the aggregate of all individual demand for the commodity demanded by all the potential consumers in the market at each possible price, over a period of time. Market demand refers to the demand of all consumers of a good or service at a given price, with other factors as money income, tastes, and preferences, prices of other goods constant.

Market Demand

Simply, the aggregate quantity demanded of a commodity at a given price by all the buyers/individuals, other things being equal, is called market demand. It is called ‘market’ demand because it depicts the market situation for a good or service. Demand is determined by a few factors, including the number of people seeking your product, how much they’re willing to pay for it, and how much of your product is available to consumers, both from your company and your competitors.

Determinants of Market Demand

There are many factors that determine the market demand for a product. They are as follows: –

  1. Product Price: – The price of a product is the most important determinant of market demand in the long run and the only determinant in the short run. According to the law of demand, the price of a product and its quantity demanded are inversely proportional, that is, the quantity demanded increases when the price falls and decreases when the price rises, other things remaining the same.
  1. Price of Related Goods: – The market demand for a commodity is also affected by changes in the price of related goods. Related accessories can be substitutes or complementary goods. Two goods are said to be a substitute for each other if they satisfy the same need of one person and a change in the price of one commodity affects the demand for the other in the same direction. For example, Tea and Coffee, Maggi and Yippie, Pepsi and Coca-Cola are close substitutes.
  1. Consumer Income: – Income is the basic determinant of the quantity demanded of a product as it decides the purchasing power of the consumers. Thus, people with higher disposable incomes spend more income on consumer goods and services than those with lower disposable incomes. Consumer goods and services can be divided into four categories: essential goods, inferior goods, general goods and prestige or luxury goods. The relationship between consumer’s income and these goods is explained below: –
    • Essential Consumer Goods: – Essential commodities are the basic necessities of life and are consumed by all the individuals of the society. Like food grains, salt, cooking oil, clothes, housing etc., the demand for such goods increases with the increase in the income of the consumer but only to a certain extent, though the total expenditure in relation to the quality of the goods may increase consumption, other things remain the same.
    • Inferior Goods: – A good is considered inferior when its demand decreases with the increase in consumer’s income to a certain level and vice versa. For example, bajra, bidi are substandard goods.
    • General Goods: – General Goods are those goods whose demand increases with the increase in the income of the consumer, such as clothing, household furniture, automobiles etc. It should be noted that demand for general goods increases rapidly with increase in the income of the consumer but slows down with further increase in income.
    • Luxury Goods: – Luxury goods are those goods which increase the prestige and pleasure of the consumer without increasing the income. For example, jewellery, stones, gems, luxury cars etc. The demand for such goods increases with the increase in the income of the consumer.
  1. Consumers’ Choices and Preferences: Consumer’s tastes and preferences play an important role in determining the demand for a product. Tastes and preferences often depend on the lifestyle, culture, social customs, hobbies, age and gender of consumers and religious sentiments associated with an item. Changes in any of these factors result in changes in consumer tastes and preferences, resulting in an increase or decrease in demand for the product.
  1. Advertising Expenses: – Advertising is done to promote the sale of a product. It helps in stimulating the demand for a product in four ways; By informing potential consumers about the availability of the product, showing its superiority over the competitor’s brand, influencing consumer choice against the rival product, and setting new fashions and changing tastes of consumers.
  1. Expectations of consumers: – In the short run, the consumer’s expectation with regard to income, future prices of the product and its supply conditions play an important role in determining the demand for a commodity. If the consumer expects a high rise in the price of the commodity, he should buy it today at a higher present price to avoid a higher price pinch in the future.
  1. Performance Effect: – Often, new products or new models of an existing product are bought by wealthy people. Some people buy goods because of their actual need or because of extra purchasing power. While some others do so because they want to showcase their affluence. Once an item is very much in fashion, many families buy them not because they really need them, but because their neighbours have bought it. Thus, the purchases made by such people arise out of feelings like jealousy, equality in society, competition, social inferiority, status consciousness. Purchases made because of these factors result in a performance effect, also known as the bandwagon effect.
  1. Consumer-credit facility: – The availability of credit to the consumer also determines the demand for the product. Loans given from vendors, banks, friends, relatives or other sources induce the consumer to buy more than that which would not have been possible in the absence of credit. Thus, consumers with higher borrowing capacity consume more than those who borrow less.
  1. Population of the country: – The population of a country largely determines the total domestic demand for the product of consumption. For a given level of per capita income, tastes and preferences, prices, incomes, etc., the larger the size of the population, the greater will be the demand for the product and vice versa.
  1. Distribution of National Income: – National income is one of the basic determinants of market demand for a product, such that the higher the national income, the greater the demand for all common goods. Apart from its level, the distribution pattern of national income also determines the aggregate demand for a product.

What is the market demand equation?

The experts at provide the formula Qd = a – b(P) to chart the demand curve, where “Qd” stands for the quantity demanded and “a” represents all factors affecting the price other than your product’s price. The “a” is calculated using surveys, statistics and trends to estimate the factors of your target market that are not related to the price of your product. Then, “b” represents the slope of the demand curve.

The slope is determined by the change in the Y-axis over the change in the X-axis between any two points on the curve. In almost all cases, the slope is negative. “P” should equal the price of your product or service. The curve of the market demand trends negative overall, which makes sense when you think about it. As a product becomes more expensive, consumers become less willing to purchase it.

Market Demand Curve

By summing the individual demands at different prices, we can get different ‘price-quantity’ combinations for the market demand curve. The market demand curve is the sum of all individual demand curves in a given market. It shows the quantity demanded of the commodity by all the individuals at different price points. For example, at $10/product, the quantity demanded by everyone in the market is 150 products per day. At $4/product, the quantity demanded by everyone in the market is 1,000 products per day. The market demand curve gives the quantity demanded by each individual in the market for each price point. The market demand curve is typically graphed and downward sloping because as price increases, the quantity demanded decreases. 

Market Demand Curve

What is the difference between Market Demand vs. Aggregate Demand?

The market for each good in an economy faces a different set of circumstances, which vary in type and degree. In macroeconomics, we can also look at aggregate demand in an economy. Aggregate demand refers to the total demand by all consumers for all good and services in an economy across all the markets for individual goods. Because aggregate includes all goods in an economy, it is not sensitive to competition or substitution between different goods or changes in consumer preferences between various goods in the same way that demand in individual good markets can be.

What is the difference between Individual Demand and Market Demand?

Individual demand implies, the quantity of good or service demanded by an individual household, at a given price and at a given period of time. For example, the quantity of detergent purchased by an individual household, in a month, is termed as individual demand.

Whereas, Market Demand implies the sum total of all individual demand for the commodity at each possible price, over a period of time. For example, There are 10 consumers of detergent in the market, wherein their monthly demand for detergent is 10kg, 5kg, 4kg, 6kg, 5kg, 3kg, 7kg, 12kg, 6kg and 4 kg respectively. So, the market demand for detergent is 62kg.

MeaningIndividual Demand implies the quantity demanded of a commodity by a single potential consumer, firm, or household, at different price levels, and during a given period.Market demand for a commodity refers to the aggregate quantity of the commodity demanded by all the potential consumers in the market at different price levels, over a certain period.
CurveDepicts the relationship between quantity demanded by a single consumer, as we change the price.Depicts the relationship between the total quantity demanded and the market price of the goods.
Inter-RelationshipComponent of Market Demand.Summation of Individual demand of all buyers.
Demand curve appearsSteeperRelatively flatter
Law of DemandIt does not always follow the law of demandIt always follows the law of demand.

Key differences between Individual Demand and Market Demand are as follows: –

  1. Individual demand represents the quantity demanded by a single consumer, for any given product, at any given price, at any point in time. On the other hand, market demand is the aggregate quantity that all the consumers of a commodity are willing and able to buy at a point of time, in a market at different possible prices.
  1. Both Individual Demand Curve and Market Demand Curve have a negative slope, i.e. from left to right showing an indirect functional relationship between the price of the commodity and the quantity demanded. Other things being constant, an individual demand curve showcases the relationship between quantity demanded by a single consumer, as we change the price. Conversely, the market demand curve indicates the relationship between the total quantity demanded and the market price of the goods.
  1. While individual demand is a component of market demand. On the other hand, market demand is the summation of all individual demand of all consumers.
  1. The market demand curve is flatter in comparison to the individual demand curve.
  1. Individual demand does not always follow the law of demand whereas market demand always follows the law of demand. As per the law of demand, when there is an increase in the price of the commodity, the quantity demanded will decrease.

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