What is market demand function?
Market demand function expresses the relationship between the market demand for a commodity and its various determinants. The market demand function for a good at a particular price is the sum total of the demands of all the consumers in a market.
Algebraically, it is expressed as:
M.Dx = f (Px, Py, M, T, E, N, Md)
M.Dx : Represents market demand for commodity ‘x’
Px represents price of commodity ‘x’
Py represents price of related goods
M represents income of buyers
T represents tastes and preferences
E represents expectation of buyers
N represents population size
Md represents income distribution
(1) Price of commodity (Px): Other things remaining constant, at higher prices, consumers will demand less of commodity and vice–versa, hence confirming an inverse relationship between price and market demand of a commodity.
(2) Prices of related goods (Py): A rise in the price of substitute goods will lead to increase in the demand of other substitute goods and vice–versa, hence confirming direct relationship between the demand of a good and price of its substitutes. On the other hand, rise in price of complementary goods will lead to fall in the demand of other complementary goods, hence depicts which indirect relationship between the demand of a good and price of its complementary.
(3) Income of buyers (M): The demand for normal goods in the market will tend to increase with the increase in income and vice–versa. On the other hand, the demand for inferior goods tends to decrease with the increase in income and vice–versa.
(4) Tastes and preferences of buyers (T): Other things remaining constant demand for those goods increases for which consumers develop favorable attitude. On the contrary, the unfavorable demand for few goods will lower the demand for such goods.
(5) Expectation of buyers (E): If consumers expect prices of goods price to rise in future, then they will demand for that commodity leading to a rise in demand. Similarly, expectation regarding prices to be lowered in future will make the consumer to postpone their consumption or demand; hence, demand will be less.
(6) Population size (N): The rise (fall) in the population (in terms of no. of consumers) will increase (decrease) the demand for goods, hence market demand.
(7) Income Distribution (Md): The equal distribution in income will create more demand in the market. On the other hand, if income is not equally distributed, there will be less demand in the market.