What role does demand play in the Market system?

In the Market system, its a buyer .i.e Demanders and sellers .i.e Suppliers whose interaction sets the price and quantity of the products. It is the case in every industry, either its gas stations or grocery stores. Now the question is how these buyers influence the decision likes what quantity of a particular product should be produced and at what price that should be sold. For that, we have to understand the concept of demand. In this article, we are going to discuss the demand side of the market.

Demand:

Demand is a pattern of buyer behavior that shows the amount of product he or she is willing and able to buy at a particular price during a specific period.

The factor of willingness and ability to purchase is important here because willingness without ability is ineffective in the market. Like, a buyer is willing to buy a laptop, but if his or her will to purchase does not back by the required amount of money, we can’t consider this willingness in the market decision making.

Take the hypothetical example of the consumer purchasing behavior of a milk carton in the table below. We can see in the table no.1 and graph that as the price of a milk carton increases the demand for a milk carton decreases. But this table tells us nothing about how we set the price in the market and decide the quantity to produce instead this graph and table only tell us about the general trend of buyer purchasing behavior.  

Price of a milk cartonQuantity demanded per month
$719
$817
$915
$1013
$1111
$129
$137
$145
Table no. 1

The demand for the product always discussed in terms of time like a day, a week, a month, or a year otherwise it’s meaningless to describe because we can’t get an idea either the demand is big or small. For example, if we say “ Fatima will purchase 19 cartons of milk at $7” is not giving us enough information for making a decision instead if we say “ Fatima will purchase 19 cartons of milk per month at $7” is giving us significant information to understand the demand pattern of the customer. 

Law of Demand: 

In economics, the law of demand is defined as an inverse relationship between price and quantity demanded which means as the price of a product increases customer’s demand for that particular product decreases while other things equal.  

The assumption of other things equal is important to consider because the demand pattern of the consumer depends also on other factors like the price of substitute products or relative prices of other brands for the same product. For example, if the prices of  Khaadi increases but prices of other brands like J., Bonanza, and Ward remain the same then customers would buy less Khaddi and go for other brands more. However, if the prices of Khaadi, J., Bonanza, and Ward increase by the same amount as by $5 then consumers buying behavior would not show any significant fluctuations. 

Justifications for the law of demand 

  1. It is common sense to expect from the people to purchase less as the prices increases because prices are the biggest obstacle that hinders the buying decisions. We can take the example of it from the end season sales on outlets in which sellers attract the customers through low prices to clear the stocks of the season. 
  2. The second reason is the law of diminishing return, which states that with each new addition, the level of satisfaction reduced for the person. For instance, if you drink a half-gallon of milk, your satisfaction level would decrease with each next gallon that you would drink. 
  3. Income is also the factor that helps to make the point more clear like with high prices, the buyers would have the low power to purchase more and vice versa. 
  4. Substitute goods are another reason for this inverse relationship. As mentioned earlier, if the same product is available in another shop at a low cost, the buyer would go for that to buy the same product at a lower cost.

Change in Demand Determinants:

In the law of demand, we only talk about price as a determinant of demand, this is a hypothetical case, in reality, other factors also show their effect on demand curve due to which demand curve move left if the decrease in demand and right if the increase in demand. Some of these determinants are: 

  • Consumer purchasing preferences 
  • Number of consumers 
  • The income of the consumers
  • Prices of  substitute products 
  • Expectations of  buyers

Like if we talk about consumer purchasing preferences we can take an example of digital cameras after their introduction in market demand for film cameras greatly reduced. It means the demand for film cameras decreased whatever the price might be and shifts the demand curve to left.  

Also Read: Out of the 3 economic systems, what kind of economic systems now prevailing worldwide?