Determinants of Demand / the Factors Affecting Demand

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Factors Affecting Demand or
 Determinants of Demand :
The factors that influence the decision of household to purchase a commodity are known as the determinants of demand.  These are as follows – 
 1. Price of the commodity
 2. Income of the consumer
 3. Consumer’s taste and preferences
 4. Prices of Related Goods
 5. Consumer’s expectations
 6. Consumer credit facility
 7. Size and composition of Population 
 8. Distribution of Income 
 9. Climatic Factor
 10. Government policy
 11. Demonstration Effect

1. Price of 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 determine 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 income, the demand for a commodity also increases.
   There are three types of goods – 
  1. Normal goods(NG)
  2. Inferior Goods (IG)
  3. Inexpensive necessities of life (IN)
  1. Normal Goods:
 The goods demand for which increases with the increase in income and decreases with the decrease in income.
   Example, luxury items – refrigerator, television sets, cars, all the items of comfort.
 
  2. Inferior Goods (IG) : 
    The goods the demand for which falls with increase in income are known as inferior goods.  
    Example, Coarse cereals like maize or jowar, demand for jowar decrease when income increases beyond particular level, because the consumer may substitute this coarse  cereals with superior quality cereals like – wheat, rice etc.

3. Inexpensive necessities of life (IN) :
   Example, Salt and matchbox, the quantity purchased increases with increase in income up to certain level and then it remain constant. 
      Following figure shows the relation between income and demand regarding normal goods, inferior goods and inexpensive necessities –
Normal goods, inferior goods, inexpensive necessities

  

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 other 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 – 

 1. Substitute or Competitive goods 

2. Complementary goods 

 1. Substitute / 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 , and coke and pepsi

 There is a direct relation between the demand of one product and the price of its substitute 

 Example, in case of tea and coffee – 

   Demand (tea)  α  Price (coffee) 

   Demand 1  α   Price 2 

  This relation is indicated by positively sloping curve KL in the figure –


 

Relation between price of coffee and demand for tea

  •   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)  α  1/ 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 
In the given figure – 

Relationship between price of petrol and demand for cars



  An increase in the price of petrol from OP0 to OP1 causes not only a decrease in the demand for petrol, but it also causes a decrease in the demand for cars from OQ0  to OQ1.
    This type of demand also known as  Cross demand / Cross Price Demand.

  Cross Demand / Cross Price Effect:

  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.


       Also read:

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 arise 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 purchases 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 consumer 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. For example,  Demand for ice, fans, AC, coolers, cold drinks, cotton cloths etc, increases in summer.

    Like wise,  the demand for heater, blowers, hot drinks and woolen clothes etc, increases in winters.


  10. Government policy:

   Demand for commodities also influenced by the government policy.

  If the government imposes taxes on various commodities in form of GST, excise duties etc, the prices of these commodities will increase.

 Due to increase in price, demand for these commodities will fall.

  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 form 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, 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.


 


 


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