What is demand ?

Demand is the consumer's desire to own goods/services and the willingness to pay during a time period. Goods/services can either be finished goods/services or intermediate goods. We often think that the demand for a particular good depends on the price of the good but in fact in addition to the price of the good it also depends on a few other factors like individual income, price of related goods etc. Mathematically, the demand function can be expressed as:

     Q_Dx = f(P_x, I, P_y)

    where:

     Q_Dx = Quantity of the good X demanded

     P_x = Price of the good X

     I = Income

     P_y = Price of related goods

Consider your demand for petrol over a week. Lets assume your demand function to be:

      Q_Dpetrol =  9 -  Ppetrol + 0.05I + 0.11Ppublic transport - 0.004P_car 

As per the law of demand, consumers tend to buy less when the price increases and thus the coefficient of the Ppetrol  is -1. The coefficient of income indicates your willingness to spend your income to buy petrol. So the maximum value that the coefficient can take is 1 because you cannot spend more than 100% of the money you have got ;-) The public transport and car here are related goods. If the price of the public transports increase, then your demand for petrol increases (such goods/services are said to be substitutes) and if the price of the car that you want to buy increases, then your demand for petrol decreases (such goods/services are said to be complements). Assuming that your income is 50,000 INR, price of public bus travel is 50 INR and the car price is 5,00,000 INR, your demand function becomes:

     Q_Dpetrol =  9 -  Ppetrol + 0.05(50,000) + 0.11(50) - 0.004(5,00,000)

     Q_Dpetrol =  9 -  Ppetrol + 2500 + 5.50 - 2000      

    Q_Dpetrol =  514.50 -  Ppetrol

We generally graph demand curves with price (the independent variable) on the Y axis and quantity (the dependent variable) on the X axis. So after rearranging the above equation, we have:

     Ppetrol = 514.50 - Q_Dpetrol 

The graph of the above equation for positive prices is shown in the figure below.

The fact that quantity demanded increases at lower prices is called as law of demand.