Types of Demand

Read: Concept of Demand in Managerial Economics

The different types of demand are;

i) Direct and Derived Demands

Direct demand refers to demand for goods meant for final consumption; it is the demand for consumers’ goods like food items, readymade garments and houses. By contrast, derived demand refers to demand for goods which are needed for further production; it is the demand for producers’ goods like industrial raw materials, machine tools and equipments.

Thus the demand for an input or what is called a factor of production is a derived demand; its demand depends on the demand for output where the input enters. In fact, the quantity of demand for the final output as well as the degree of substituability/complementarty between inputs would determine the derived demand for a given input.

For example, the demand for gas in a fertilizer plant depends on the amount of fertilizer to be produced and substitutability between gas and coal as the basis for fertilizer production. However, the direct demand for a product is not contingent upon the demand for other products.

ii) Domestic and Industrial Demands

The example of the refrigerator can be restated to distinguish between the demand for domestic consumption and the demand for industrial use. In case of certain industrial raw materials which are also used for domestic purpose, this distinction is very meaningful.

For example, coal has both domestic and industrial demand, and the distinction is important from the standpoint of pricing and distribution of coal.

iii) Autonomous and Induced Demand

When the demand for a product is tied to the purchase of some parent product, its demand is called induced or derived.

For example, the demand for cement is induced by (derived from) the demand for housing. As stated above, the demand for all producers’ goods is derived or induced. In addition, even in the realm of consumers’ goods, we may think of induced demand. Consider the complementary items like tea and sugar, bread and butter etc. The demand for butter (sugar) may be induced by the purchase of bread (tea). Autonomous demand, on the other hand, is not derived or induced. Unless a product is totally independent of the use of other products, it is difficult to talk about autonomous demand. In the present world of dependence, there is hardly any autonomous demand. Nobody today consumers just a single commodity; everybody consumes a bundle of commodities. Even then, all direct demand may be loosely called autonomous.

iv) Perishable and Durable Goods’ Demands

Both consumers’ goods and producers’ goods are further classified into perishable/non-durable/single-use goods and durable/non-perishable/repeated-use goods. The former refers to final output like bread or raw material like cement which can be used only once. The latter refers to items like shirt, car or a machine which can be used repeatedly. In other words, we can classify goods into several categories: single-use consumer goods, single-use producer goods, durable-use consumer goods and durable-use producer’s goods. This distinction is useful because durable products present more complicated problems of demand analysis than perishable products. Non-durable items are meant for meeting immediate (current) demand, but durable items are designed to meet current as well as future demand as they are used over a period of time. So, when durable items are purchased, they are considered to be an addition to stock of assets or wealth. Because of continuous use, such assets like furniture or washing machine, suffer depreciation and thus call for replacement. Thus durable goods demand has two varieties – replacement of old products and expansion of total stock. Such demands fluctuate with business conditions, speculation and price expectations. Real wealth effect influences demand for consumer durables.

v) New and Replacement Demands

This distinction follows readily from the previous one. If the purchase or acquisition of an item is meant as an addition to stock, it is a new demand. If the purchase of an item is meant for maintaining the old stock of capital/asset, it is replacement demand. Such replacement expenditure is to overcome depreciation in the existing stock.

Producers’ goods like machines. The demand for spare parts of a machine is replacement demand, but the demand for the latest model of a particular machine (say, the latest generation computer) is anew demand. In course of preventive maintenance and breakdown maintenance, the engineer and his crew often express their replacement demand, but when a new process or a new technique or anew product is to be introduced, there is always a new demand.

You may now argue that replacement demand is induced by the quantity and quality of the existing stock, whereas the new demand is of an autonomous type. However, such a distinction is more of degree than of kind. For example, when demonstration effect operates, a new demand may also be an induced demand. You may buy a new VCR, because your neighbor has recently bought one. Yours is a new purchase, yet it is induced by your neighbor’s demonstration.

vi) Final and Intermediate Demands

This distinction is again based on the type of goods- final or intermediate. The demand for semi-finished products, industrial raw materials and similar intermediate goods are all derived demands, i.e., induced by the demand for final goods. In the context of input-output models, such distinction is often employed.

vii) Individual and Market Demands

This distinction is often employed by the economist to study the size of the buyers’ demand, individual as well as collective. A market is visited by different consumers, consumer differences depending on factors like income, age, sex etc. They all react differently to the prevailing market price of a commodity. For example, when the price is very high, a low-income buyer may not buy anything, though a high income buyer may buy something. In such a case, we may distinguish between the demand of an individual buyer and that of the market which is the market which is the aggregate of individuals. You may note that both individual and market demand schedules (and hence curves, when plotted) obey the law of demand. But the purchasing capacity varies between individuals. For example, A is a high income consumer, B is a middle-income consumer and C is in the low-income group. This information is useful for personalized service or target-group-planning as a part of sales strategy formulation.

viii) Total Market and Segmented Market Demands

This distinction is made mostly on the same lines as above. Different individual buyers together may represent a given market segment; and several market segments together may represent the total market. For example, the Hindustan Machine Tools may compute the demand for its watches in the home and foreign markets separately; and then aggregate them together to estimate the total market demand for its HMT watches. This distinction takes care of different patterns of buying behavior and consumers’ preferences in different segments of the market. Such market segments may be defined in terms of criteria like location, age, sex, income, nationality, and so on

x) Company and Industry Demands

An industry is the aggregate of firms (companies). Thus the Company’s demand is similar to an individual demand, whereas the industry’s demand is similar to aggregated total demand. You may examine this distinction from the standpoint of both output and input.

For example, you may think of the demand for cement produced by the Cement Corporation of India (i.e., a company’s demand), or the demand for cement produced by all cement manufacturing units including the CCI (i.e., an industry’s demand). Similarly, there may be demand for engineers by a single firm or demand for engineers by the industry as a whole, which is an example of demand for an input. You can appreciate that the determinants of a company’s demand may not always be the same as those of an industry’s. The inter-firm differences with regard to technology, product quality, financial position, market (demand) share, market leadership and competitiveness- all these are possible explanatory factors. In fact, a clear understanding of the relation between company and industry demands necessitates an understanding of different market structures.

About Abey Francis

Abey Francis is the founder of MBAKnol - A Blog about Management Theories and Practices - and he's always happy to share his passion for innovative management practices. You can found him on Google+ and Facebook. If you’d like to reach him, send him an email to: [email protected]

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