Determinants of Demand or the Factors Affecting Demand :
The factors that influence the decisions of households to purchase a commodity are known as the determinants of demand.
These are as follows
1.Price of the Commodity
* The most important determinant of demand for a commodity — is the Price of the commodity itself.
* The price of the commodity is inversely related to the demand
Price α 1/demand
- Lower the price of the commodity, the larger is the quantity demanded and the higher the price of the commodity demanded, the lesser is the quantity demanded.
2. Income of the Consumer
- It is the basic determinant of the quantity demanded as it determines the purchasing power of the consumer.
- There is a direct relationship between the income of the consumer and his demand for a product.
- With the increase in the income, the demand for a commodity also increases.
While discussing the relationship between income of the consumer and the demand for a commodity, we may distinguish between three types of goods -
Normal goods, inferior goods and inexpensive necessities of life.
1.Normal Goods
The goods, demand for which increases with the increase in income and decreases with the decrease in income are called as normal goods.
Example — Luxury items — refrigerator, television sets,cars, all the items of comfort etc.
2. Inferior Goods
The goods the demand for which falls with the increase in income are called as inferior goods.
Example : Coarse cereals like maize/ jowar. Demand for jowar decreases when income increases beyond particular level, because the consumer may substitute this coarse cereals with superior quality cereals like — wheat, rice.
3.Inexpensive Necessities
Example: salt and matchbox, the quantity purchased increases with increase in income up!to a certain level and then it remain constant.
Relation between income and demand
3.Consumer’s taste and preferences
The demand is also influenced by the consumer’s taste and preferences. The taste and preference depends on — fashion, habits of people, social customs, advertisement and lifestyle of people.
4. Prices of Related Goods
The price of related goods also affect the demand of a commodity.
Related goods are classified in two categories -
- Substitute or Competitive goods
- Complementary goods
1. Substitute or Competitive goods -
Substitute goods are those which satisfy the same type of need and hence can be used in place of one another to satisfy a given want.
Example : Tea and Coffee ; Coke and Pepsi .
There is a direct relationship between the demand of one product and the price of its substitute. Example, in case of tea and coffee -
Demand of (tea) is directly proportional to the Price of (coffee)
Or Demand (1) α Price (2)
This relation is indicated by positively slope curve D in the figure given below
With the increase in the price of coffee the demand for tea has increased.
The increase in demand for tea is not because of fall in its own price but due to increase in the price of its substitute — coffee.
Thus the demand for a commodity varies directly with a change in the price of its substitute.
2. Complementary Goods
Complementary goods are those goods which are complementary to one another in the sense that they are used jointly or consumed together to satisfy a given demand.
Example: Car and Petrol, Gas and Gas stove.
There is an inverse relationship between the demand of a good and the price of its complement.
Demand (car) inversely proportional to Price (petrol)
Demand (1) α 1/Price (2)
The demand of a commodity and the price of its complement is represented by a downward sloping curve (HR)
Complementary goods curve
An increase in the price of petrol from point P to P’ causes not only a decrease in the demand for petrol, but it also causes a decrease in the demand for cars from D to D’.
This type of demand is also known as Cross Demand or Cross Price Effect.
# Cross Demand
When the demand for one commodity is affected by the change in the price of another commodity, this type of demand is known as Cross demand or Cross Price Effect.
5. Consumer’s expectations :
If consumer expect a rise in the price of a commodity in future, they would demand greater amount of this commodity today with a view to avoid, purchasing it at a higher price in future.
If people expect an increase in their income, they will buy more commodities in anticipation of a rise in their income.
6. Consumer Credit Facility :
If consumers are able to get credit facilities or they are able to borrow from the bank, they would be tempted to purchase certain goods, they could not have purchased otherwise.
Example: Demand for cars in India has increase as people are able to get loans from the banks to purchase cars.
7. Size and Composition of Population :
Market demand for a commodity depends on the size and composition of the population.
The larger the population, the larger is likely to be the number of consumers.
An increase in the size of population will increase in the demand for a commodity by increasing the number of consumers and vice versa.
8. Distribution of Income :
If the income distribution in a country is unequal, there will be more demand for luxury goods like cars and LED TV.
On the other hand, if the income is evenly distributed, there will be less demand for luxury goods and more demand for essential goods.
9. Climatic Factors :
Demand is also affected by climatic factors, example — Demand for ice, fans, AC, coolers, cold drinks, cotton clothes etc. Increase in summer
Likewise — the demand for heater, blowers, hot drinks and woolen clothes etc. Increases in winters.
10. Government Policy :
Demand for commodities are also influenced by the government policies.
If the government imposes taxes on various commodities in the form of GST, excise duties, etc. the prices of these commodities will increase.
But on the other hand, if the government incurs more expenditure on the construction of roads, bridges, in setting up industries etc. The demand for the goods needed for construction will increase.
11. Demonstration Effect :
Demonstration effect plays an important role in affecting the demand for a commodity.
Demonstration effect refers to the tendency of a person to emulate the consumption style of other persons such as his friends, neighbours etc.
Example : The demand for luxury cars and expensive mobile sets has increased in recent years because of the desire of the people to follow the consumption style of others.
Originally published at https://www.ecogradeshelp.com on August 5, 2022.