Composite Demand Definition
What is Composite Demand?
A demand that happens when a single product has multiple uses is called a composite demand. For example, corn is used for human consumption, to feed animals, and to produce ethanol. A rise in demand for corn in one market (say, animal feed) leads to a fall in the supply of corn in other related markets and as a result, its price increases in other markets too.
Composite Demand Formula
The following formula is used to calculate composite demand:
Composite Demand = D1 + D2 + D3 +……….+ Dn
By adding the demand for a product in all the related markets, we can easily calculate its composite demand.
Composite Demand Examples
There are countless examples of composite demand in daily life. Some of the examples are given below:
Wheat
Wheat has multiple uses. It is demanded for making bread, for animal feed and for industrial uses such as starch production.
Timber
Timber is demanded for its use in making furniture, for paper production, and for making homes.
Aluminium
Aluminium is used in construction, packaging, transportation vehicles, and various consumer goods.
Natural Gas
Natural gas is used for cooking, generating electricity, and heating homes.
Steel
Steel is demanded for multiple uses. For example, it is used in construction of buildings, manufacturing of automobiles and the making of parts of machines.
Impact of Composite Demand
In composite demand, the change in demand for a product in one market affects its supply in the related markets. For example, when we build more residential buildings on land, the land for farming will decrease, thus increasing the price of farming land.
Similarly, when the demand for wheat for making bread increases, the availability or supply of wheat for livestock feed becomes low, which increases its price in both markets. This is illustrated by the following graphs:.
The above graphs show that there is an increase in the demand for wheat to make bread because more people consume bread in their daily lives due to an increase in human population. Due to this, the supply of wheat decreases in other markets and shortages of wheat occur for other uses. Due to this shortage, the price of wheat increases, as an animal feed. That’s why composite demand is an important cause of the rise and fall of prices for multiple products.
Importance of Composite Demand
The composite demand is important because it explains the relationship between the demands for a product in multiple related markets. The composite demand is also important because it contains the demand for all the customers. It covers every segment of consumers, such as individuals and institutions. The composite demand gives an overall and detailed view of a product’s market size. For example, a demand that comes from the elite class, middle class, households, students, medical sector, etc. The composite demand consists of all the demands of each class and then provides an overall aggregate picture. With the help of this feature, we can easily plan for production capacities.
Types of Demand
The following are some main type of demand, which are explained as follows:
Joint Demand
Joint demand is the demand for complementary goods or complements. These are the products that are purchased together. For example, car and petrol, milk and cereal, or peanut butter and jelly, are purchased together. The changes in the price of a product will affect the demand for its complement. For example, an increase in the price of petrol will lead to a fall in the demand for cars.
Alternative Demand
Alternative demand, competitive demand, or substitute demand refers to the demand for substitute goods or substitutes. These are alternatively demanded goods that satisfy the same need or want. For example, Pepsi and Coca-Cola, iPhone and Android smartphones, tea and coffee, bottled water and tap water, and butter and margarine. The changes in the price of a product will affect the demand for its substitutes. For example, an increase in the price of Pepsi will lead to an increase in the demand for Coca-Cola.
Derived demand
The demand for a product that is generated by the use of other products is called derived demand. For example, when demand for pencils is high, this means there is also a high demand for wood, graphite, paint, and erasers which are used in the production of pencils. An increase in the demand for shoes will lead to a higher demand for labour (derived demand) in the shoe-making factory.
Comparing Joint Demand, Alternative Demand, Derived Demand, and Composite Demand
The following table contains the main points of difference between different types of demand.
Other types of Demand
Direct Demand
The demand for a final product is called direct demand. Direct demand is also called autonomous demand because it does not depend on the demand for other products. For example, the demand for food, clothing, and cell phones are examples of direct demand.
Short-Run and Long-Run Demands
A demand for a product that immediately goes up or down when prices are changed but the other elements remain the same is referred to as short-run demand. For example, if the price decreases too low, the manufacturer of that product has to bear the profit loss in the short run. But as time passes, he can manage to decrease its labour costs and increase prices and supplies to meet long-term demand.
Price Demand
The willingness and ability of customers to purchase a product at a given price in a given time period is called price demand. Businesses do surveys about which price point a new product is going to enter the market at. People only prefer to purchase those products whose price they feel is justified. How the demand for a product will change with a change in price is known as the price elasticity of the product.
Income Demand
When individuals earn more, they spend more. The demand for normal products increases as the income of individuals increases. Consumers’ buying behaviour also changes when income increases. This will reduce the size of one market and increase the size of another. Consumers buy products that they can afford. The demand for inferior products decreases when income increases.
Conclusion
In conclusion, composite demand is the demand for a product that has multiple uses. In composite demand, markets for different uses of the same product are linked together. If the demand for the product rises in one use, the supply of the product decreases for another, leading to an increase in its price. The composite demand is important because it provides the overall picture of all the demands related to each other.
