TYPES OF DEMAND
The major types of demand are outlined below:
1) Joint or Complementary demand – demand for goods required together.
- It is a demand for goods that are required (used) together”.
- It is a demand for goods that are inter-related.
- Briefly, it is a demand for complementary goods.
It occurs when goods are used together. Thus they are jointly demanded and bought. If a consumer has one, he is compelled to buy the other as the absence of one renders the other useless or less useful. Thus such goods are termed as complementary items; they complement (assist) one another.
Good examples of complementary items, or goods with joint demand, are tea and sugar, motor car and petrol, pen and ink, biro and paper, etc. These goods are perfect complements as the absence of one makes the other to be completely useless (except the first pair).
- An increase in demand for one causes a rise in demand for the other.
- An increase in price of one causes a fall in demand for the other.
2) Competitive demand – demand for substitute
- It is a demand for goods that serve similar purpose.
- It is a demand for goods of which one can be substituted for another.
- Briefly, it is a demand for substitute.
A high demand for one reduces the demand for the other. This implies that one can replace another without (much) discomfort or inconvenience. Examples of goods that are substitute are butter and margarine, pen and biro, meat and fish, umbrella and rain-coat, etc.
- A rise in price of one (meat) causes an increase in demand for the other (fish – if its price has not risen proportionately).
- A fall in price of one leads to a fall in demand for the other (if its price remains the same or it has not fallen proportionately).
3) Derived Demand – demand for factors of production
- It is a demand for a factor of production (labour, e.g. a baker) resulting from demand for a commodity (bread) which he can produce (make).
- It is a demand for goods or items that assist in the production of other goods”. Thus it is a demand for capital goods or factors of production.
Factors of production are needed not for their own sake but to assist in the production of other goods. We need a parcel of land, capital (baking machines) and labour (bakers) for the purpose of baking bread. If the demand for bread rises, there will be an increase in demand for these factors of production – land, labour and capital. The demand for bakers is therefore derived from high demand for bread. Thus factors of production have “derived demand“.
4) Composite Demand – demand for goods used for several purposes.
- It is a demand for goods that serve (or are used for) two or more purposes”.
- It is the sum of different demands for a commodity. Two good examples of items with composite demand are: Wood – plank and plywood, and Iron – rod and steel.
Planks can be used for the building of houses as well as for the construction of furniture. Similarly, rod and steel are used for the manufacture of vehicles and machines as well as for the building of bridges, furniture, ships, and houses. The total (sum of) demand for rod for these items (machines, bridges, ships, houses and furniture) is called composite demand for rod.
The use of plank, rod or/steel for one purpose, like building of houses will definitely reduce its quantity available for another purpose construction of furniture – chairs and tables. This implies that an increase in price or demand for the item (plank) for one purpose (building of house) causes a rise in price for goods (furniture) of which the item is also a major raw material.
Interpretation of types of demand
Statement
- A decrease in price of one commodity (X) leads to a fall in demand for another commodity (Y). X and Y are in “competitive” demand.
- A rise in price of commodity (X) causes a fall in demand for Commodity (Y); or a fall in price of one causes a rise in demand for the other, commodity X and Y are “complement”.
- An increase in demand for one good (X) leads to a decrease in demand for another (Y). X and Y are “substitute“.
- A rise in price of commodity (F) causes an increase in demand for commodity (G). F and G are in “competitive” demand
- A fall in price of one commodity causes a rise in demand for another. The two commodities are in “joint” demand.