Demand refers to the desire and ability to purchase any given commodity or service at different prices, at different prices of complementary or competing goods and at different levels of income. There are various factors including price of goods, price of related goods, income of consumer etc. that affect the quantity demanded of goods & services and these factors are known as determinants of demand.
Determinants of demand:
The determinants of demand are discussed below.
1.Price of the commodity:
Ceteris paribus i.e., other things remaining constant or equal, an increase in the price of the goods or service results in the decrease in demand and vice versa. In other words, the demand of the goods & service is inversely related to its price.
2. Price of related commodities:
Related commodities are further categorized into two categories. Let’s discuss the two categories and their impact on the increase and decrease in demand.
- Complementary goods: Complementary goods are those goods that are consumed together for example tea & sugar, bread & butter, pen & ink. In case of complementary goods, increase in price of one commodity will result in the decrease in demand of the complementary commodity and vice versa. For example increase in price of pen will result in the decrease in the demand of ink and the decrease in price of pen will have a reverse effect. Therefore, there is an inverse relationship between the price of a good and the demand of the complementary good.
- Substitutes or competing goods: Competing goods or substitutes are those goods that can be consumed in place of one another and usually satisfy the same need. For example ball pen & Gel pen, tea & coffee etc. In case of competing goods, increase in price of one commodity will result in the increase in demand of the competing commodity and vice versa. For example increase in price of Gel pen will result in the increase in the demand of ball pen and the decrease in price of Gel pen will have a reverse effect. Therefore, there is a direct relationship between the demand of a goods and the price of the competing goods.
3. Income of the consumer:
Ceteris paribus i.e. other things remaining constant or equal, the demand of a good or service also depends upon the income of the consumer and usually an increase in the income of the consumer results in the increase in demand of commodity and vice versa as the purchasing power of a person depends upon the income of the person.
But there are some goods known as inferior goods where the increase in income results in the decrease in demand such as bajra may become inferior good when the income of a consumer rises as with the increase in income consumers may switch to better substitute i.e. wheat.
4. Taste & preferences of the consumer:
Taste& preferences of the consumers also affects the quantity demanded. The products that are modern and trending have high demand whereas the products that are obsolete and out of fashion losses demand in the market. Moreover we can say if there is favorable change in the taste & preferences of the consumer than the demand of the commodity rise whereas in case of unfavorable change, demand declines.
5. Consumer’s Expectations:
The expectations of the consumer related to the prices of the commodity in future and their supply, income of the consumer etc. also influence the demand of the product. If the consumer expect that
- Future prices will rise/ income will increase/ supply will reduce then the demand of the given commodity increases.
- Future prices will decrease/ income will decrease/ supply will increase then the demand of the given commodity decreases.
6. Size of Population:
The composition of the population also determines the demand. Greater the size of population, larger is the demand for the products and vice versa.
7. Composition of Population:
Even the composition of population influences the demand of the commodity. For example if there are children in the population then the demand of toys, chocolates, baby food etc. will be high whereas if there are old age people in the economy than the demand of walking sticks, medicines, spectacles etc. will be more.
8. Level of national income:
The level of national income is also an important factor that affects the demand. If the national income is high, the demand of normal product or service will be high. In the nation where the income is unevenly distributed and rich people are very less as compared to the poor, the demand for normal consumer product or service is very low but if the income distribution becomes equal then the consumption of product or services will increase leading to the increase in overall demand.
9. Government Policy:
Changes in government policies also have impact on the demand of goods & services. For example increase in tax rate on a particular product will result in the increase in price of that product thereby decreasing the overall demand of the product and vice versa.Moreover, ban on products by government, increase and decrease in interest rates, various schemes and policies& subsidies affects the demand of the product or service.
10. Weather Conditions:
It is very usual that the demand changes with the change in weather. For example in summer season summer clothes, ice-creams are demanded more, in rainy seasons the demand for rain coats and umbrella increases and in winter seasons demand shifts to winter wear.
The demand for different goods & services is influenced by many factors known as determinants of demand and these determinants are important and all the business firms consider these determinants while deciding over there production & marketing strategies. Apart from the factors discussed above, business conditions, Marketing strategies & discount, interest rate, availability of credit card facility, level of education, wealth, marital status, customs & conventions etc. also influence the demand of product and service in the market.