Nature of demand for durable goods is of special interest in demand theory.
Demand for durable goods is more volatile than the demand for non-durable goods.
In economics durable goods are defined as those goods that go on yielding services to the consumers over a number of periods in future. Further, because of their durability they can be stored for longer periods of time. It is due to the use of services of durable goods for a relatively long term that consumers’ demand for them is more volatile, that is, fluctuates very much.
Now what accounts for the large volatility in demand for durable goods? First, since durable goods can be stored, producers, distributors and consumers usually keep a large inventories of such goods. Therefore, increase in demand for them may not show up in more production of such goods for quite some time because the greater demand for them can be met by drawing upon their inventories.
On the other hand, when inventories of durable goods are low even a small increase in demand for them by their consumers may actually lead to greater market demand because producers and distributors would also tend to increase their demand for holding more inventories to accommodate their large demand in future.
The other factor responsible for volatility in demand for durable goods is that replacement of these durable goods can be deferred by undertaking additional maintenance expenditure on existing durable goods possessed by them. For example, an old car may be got replaced or its old model may be used for a longer period. Similarly, the purchase of new furniture may be postponed by tolerating the use of old furniture for one more year.
Thus, analysis of demand for durable goods must consider not only new consumers’ demand for them but also consider the need for building up their inventories by distributors and producers and replacement demand for them which may be deferred. It is not mere physical deterioration which calls for replacement of durable goods but more important is the fact that models of the durable goods being currently used may go out of fashion and therefore lose their prestige value.
However, the important difference between non-durable and durable goods is that non- durables are purchased for current consumption only, whereas durables are demanded for getting their services in future periods. Consequently, their demand for them crucially depends on consumers’ expectations regarding their future incomes, especially when they buy them on credit, availability of these durables in future, expectations regarding future prices, rate of change in technology that make them obsolete.
Thus, fluctuations in demand for durables is relatively greater as it depends on expectations of consumers about future developments. If the expectations of consumers are such that prices of durables will rise in future due to their short supply, their demand for them will increase not only to meet their current consumption needs but also for storing them for future use. Similarly, if consumers expect their prices will fall in future, they will postpone their purchases resulting in large decline in their demand.
There are some goods which are not demanded by individuals to satisfy their wants directly but for using them to produce other consumer goods which directly satisfy their wants. Demand for them is called derived demand as its is derived from the demand for other goods. Thus, demand for car and housing loans is not determined directly but is derived from the demand for cars or houses which are purchased with the loan money.
However, the important case of derived demand is demand for producers’ goods such as raw materials, machines and other types of capital equipment, spare parts etc. These producers goods are not consumed directly by individuals to satisfy their wants.
For example, demand for copper does not solely depend on individuals’ desire for copper itself but rather for using it to produce products which are wholly or partly made of copper In fact individuals, wants for them may be quite independent of the fact that copper is used in their production. Therefore, for the analysis of demand for the products for which there is derived demand we must consider the factors that affect demand for ultimate goods in the production of which producer goods are used.