What is law of demand demand function? and how to determine the demand

Law of Demand

The Law of Demand states that, other things remaining constant, there is an inverse relationship between the price of a commodity and its quantity demanded.

• If price rises, demand falls.

• If price falls, demand rises.

Demand Function

The demand function shows the relationship between the quantity demanded and its determinants:

$$Dn = f(Pn, Ps, Pc, Y, T)$$

Where:

• Dn = Demand for commodity ‘n’

• f = Functional relationship

• Pn = Price of the commodity

• Ps = Price of substitute goods

• Pc = Price of complementary goods

• Y = Income of the consumer

• T = Taste and preferences of the consumer

Determinants of Demand

The demand for a commodity depends on various factors. These factors are called determinants of demand. The main determinants are:

1. Price of the Good

• The demand for a product primarily depends on its own price.

• When price increases, the demand decreases.

• When price decreases, the demand increases.

• This follows the Law of Demand, showing an inverse relationship between price and demand.

2. Prices of Substitute Goods

• Substitute goods are those that can replace each other, like tea and coffee.

• If the price of a substitute (e.g., coffee) falls, its demand increases, and the demand for the original good (e.g., tea) falls.

• Thus, demand for a good and the price of its substitute are positively related.

3. Prices of Complementary Goods

• Complementary goods are used together, like cars and petrol.

• If the price of a complement (e.g., petrol) rises, the demand for both petrol and cars will fall.

• So, demand for a good and the price of its complement are negatively related.

4. Income of the Consumer

• For normal goods: When income increases, demand increases; when income falls, demand falls.

• For inferior goods: When income increases, demand decreases, and vice versa.

5. Tastes and Preferences

• Changes in consumer tastes and preferences directly affect demand.

• If a product becomes more fashionable or preferred, its demand rises.

6. Population

• A larger population leads to higher demand for goods and services.

• A smaller population results in lower demand.

7. Climate

• Demand also depends on climatic conditions.

  • In hot weather, demand for cold drinks rises.

  • In rainy seasons, demand for umbrellas increases.