Needs, Wants and Demand

Needs -Human needs are the basic requirements and include food clothing and
shelter. 
Wants – Wants are a step ahead of needs and are largely dependent on the needs of
humans themselves. If you are hungry then you need is food. But I am sure you want to
fulfill your hunger by your favorite food item, lets say Pizza.
Demands – You might want a BMW or a Mercedes for a car. You might want to go for a
cruise. But can you actually buy a BMW or go on a cruise? You can provided you have
the ability to buy a BMW or go on a cruise. Thus a step ahead of wants is demands.
When an individual wants something which is premium, but he also has the ability to
buy it, then these wants are converted to demands. The basic difference between wants
and demands is desire. A customer may desire something but he may not be able to
fulfill his desire.
Example of demand – Cruises, BMW’s, 5 star hotels etc.

Demand and Supply

Demand refers to how much (quantity) of a product or service is desired by buyers. The

quantity demanded is the amount of a product people are willing to buy at a certain price;
the relationship between price and quantity demanded is known as the demand
relationship. Supply represents how much the market can offer. The quantity supplied refers
to the amount of a certain good producers are willing to supply when receiving a certain
price. The correlation between price and how much of a good or service is supplied to the
market is known as the supply relationship. Price, therefore, is a reflection of supply and
demand.

The relationship between demand and supply underlie the forces behind the allocation of
resources. In market economy theories, demand and supply theory will allocate resources
in the most efficient way possible

The Law of Demand

The law of demand states that, if all other factors remain equal, the higher the price of a
good, the less people will demand that good. In other words, the higher the price, the lower
the quantity demanded. The amount of a good that buyers purchase at a higher price is less
because as the price of a good goes up, so does the opportunity cost of buying that good.
As a result, people will naturally avoid buying a product that will force them to forgo the
consumption of something else they value more. The chart below shows that the curve is a
downward slope

A, B and C are points on the demand curve. Each point on the curve reflects a direct
correlation between quantity demanded (Q) and price (P). So, at point A, the quantity
demanded will be Q1 and the price will be P1, and so on. The demand relationship curve
illustrates the negative relationship between price and quantity demanded. The higher the
price of a good the lower the quantity demanded (A), and the lower the price, the more the
good will be in demand (C).

The Law of Supply 

Like the law of demand, the law of supply demonstrates the quantities that will be sold at a
certain price. But unlike the law of demand, the supply relationship shows an upward slope.
This means that the higher the price, the higher the quantity supplied. Producers supply
more at a higher price because selling a higher quantity at a higher price increases
revenue.
 
A, B and C are points on the supply curve. Each point on the curve reflects a direct
correlation between quantity supplied (Q) and price (P). At point B, the quantity supplied will
be Q2 and the price will be P2, and so on.

Supply and Demand Relationship

Imagine that a special edition CD of your favorite band is released for $20. Because the
record company's previous analysis showed that consumers will not demand CDs at a price
higher than $20, only ten CDs were released because the opportunity cost is too high for
suppliers to produce more. If, however, the ten CDs are demanded by 20 people, the price
will subsequently rise because, according to the demand relationship, as demand
increases, so does the price. Consequently, the rise in price should prompt more CDs to be
supplied as the supply relationship shows that the higher the price, the higher the quantity
supplied.

If, however, there are 30 CDs produced and demand is still at 20, the price will not be
pushed up because the supply more than accommodates demand. In fact after the 20
consumers have been satisfied with their CD purchases, the price of the leftover CDs may
drop as CD producers attempt to sell the remaining ten CDs. The lower price will then make
the CD more available to people who had previously decided that the opportunity cost of
buying the CD at $20 was too high.

Equilibrium
When supply and demand are equal (i.e. when the supply function and demand function
intersect) the economy is said to be at equilibrium. At this point, the allocation of goods is at
its most efficient because the amount of goods being supplied is exactly the same as the
amount of goods being demanded. Thus, everyone (individuals, firms, or countries) is
satisfied with the current economic condition. At the given price, suppliers are selling all the
goods that they have produced and consumers are getting all the goods that they are
demanding.
 

As you can see on the chart, equilibrium occurs at the intersection of the demand and
supply curve, which indicates no allocative inefficiency. At this point, the price of the goods
will be P* and the quantity will be Q*. These figures are referred to as equilibrium price and
quantity.

In the real market place equilibrium can only ever be reached in theory, so the prices of
goods and services are constantly changing in relation to fluctuations in demand and supply

Determinants of Demand

Price of the Given Commodity:

It is the most important factor affecting demand for the given commodity.
Generally, there exists an inverse relationship between price and quantity
demanded. It means, as price increases, quantity demanded falls due to
decrease in the satisfaction level of consumers. For example, If price of
given commodity (say, tea) increases, its quantity demanded will fall as
satisfaction derived from tea will fall due to rise in its price.

Demand (D) is a function of price (P) and can be expressed as: D = f (P). The
inverse relationship between price and demand, known as ‘Law of Demand’,
The following determinants are termed as ‘other factors’ or factors other than
price’.

2. Price of Related Goods:

Demand for the given commodity is also affected by change in prices of the
related goods. Related goods are of two types:

(i) Substitute Goods:
Substitute goods are those goods which can be used in place of one another
for satisfaction of a particular want, like tea and coffee. An increase in the
price of substitute leads to an increase in the demand for given commodity
and vice-versa. For example, if price of a substitute good (say, coffee)
increases, then demand for given commodity (say, tea) will rise as tea will
become relatively cheaper in comparison to coffee. So, demand for a given
commodity is directly affected by change in price of substitute goods.

(ii) Complementary Goods:
Complementary goods are those goods which are used together to satisfy a
particular want, like tea and sugar. An increase in the price of complementary
good leads to a decrease in the demand for given commodity and vice-versa.
For example, if price of a complementary good (say, sugar) increases, then
demand for given commodity (say, tea) will fall as it will be relatively costlier to
use both the goods together. So, demand for a given commodity is inversely
affected by change in price of complementary goods.
Examples of Substitute and Complementary Goods:

Substitute Goods

1. Tea and Coffee

2. Coke and Pepsi

3. Pen and Pencil

4. CD and DVD

5. Ink pen and Ball Pen

6. Rice and Wheat

Complementary Goods:

1. Tea and Sugar

2. Pen and Ink

3. Car and Petrol

4. Bread and Butter

5. Pen and Refill

6. Brick and Cement

3. Income of the Consumer:

Demand for a commodity is also affected by income of the consumer.
However, the effect of change in income on demand depends on the nature of
the commodity under consideration.
i. If the given commodity is a normal good, then an increase in income leads
to rise in its demand, while a decrease in income reduces the demand.

ii. If the given commodity is an inferior good, then an increase in income

reduces the demand, while a decrease in income leads to rise in demand.

Example:
Suppose, income of a consumer increases. As a result, the consumer reduces
consumption of toned milk and increases consumption of full cream milk. In
this case, ‘Toned Milk’ is an inferior good for the consumer and ‘Full Cream
Milk’ is a normal good.

4. Tastes and Preferences:

Tastes and preferences of the consumer directly influence the demand for a
commodity. They include changes in fashion, customs, habits, etc. If a
commodity is in fashion or is preferred by the consumers, then demand for
such a commodity rises. On the other hand, demand for a commodity falls, if
the consumers have no taste for that commodity.

5. Expectation of Change in the Price in Future:

If the price of a certain commodity is expected to increase in near future, then
people will buy more of that commodity than what they normally buy. There
exists a direct relationship between expectation of change in the prices in
future and change in demand in the current period. For example, if the price of
petrol is expected to rise in future, its present demand will increase.