What are the determinants of demand?

 Determinants of Demand...

The quantity demanded for any particular commodity either increases or decreases with the passes of time due to change in several factors which are called determinants of demand. Major determinants of demand are explained below:

1. Price of commodity: Other things being equal, the demand of a commodity is inversely related to its price. It implies that a fall in the price of a commodity leads to an increase in the purchasing power of the consumer and then increases the demand for a commodity and vice versa. Suppose, a consumer has Rs.40 and he spends his entire income on consumption of X goods. Then,

When, Px= Rs.4, Dx= 10 kg

                Px= Rs.2, Dx= 20 kg

                Px= Rs.8, Dx= 5 kg

2. Price of related goods                          

• Complementary goods: Complementary goods are those goods which are consumed together to satisfy one want. They are jointly demanded. For example, pen and ink and tea and sugar ate used together. In case of complements, demand for a commodity varies inversely with price of another commodity, other things being equal. For example, a rise in the price of pen will cause a fall in the demand for ink and vice versa. 
• Substitute goods: Substitute goods are goods which can be used one in place of other. For example, tea and coffee, coke and Pepsi are substitutes for each other and can be used one in place of other easily. When goods are substitutes, a fall in the price of one leads ta a fall in the quantity demanded of its substitutes. For example, a decline in the price of mutton is more attractive and it’s substituted for pork, chicken and fish. Thus, there is positive relation between price and demand for substitutes.

3. Income of consumer: Income of consumer is the basic determinant of the quantity demanded of a commodity as it determines the purchasing power of consumers.

• Normal goods: Generally there’s a direct and positive relationship between income of consumers and the demand for normal goods. Other things being equal, when income rises demand for normal goods also rises and vice versa.
• Inferior goods: In case of inferior goods, there is an inverse relationship between income of consumers and the demand for inferior goods, other things being equal. When income rises, demand for inferior goods falls. It is because normal goods are substituted for inferior goods. A lower income will have an opposite effect on the inferior goods.

4. Advertisement: This is another factor affecting demand. Producers/sellers have to advertise to introduce goods in the market. It helps to increase demand for a commodity. When a producer/seller spends more on advertisement or the rate for advertisement expenditure is high, demand for a commodity will increase, because consumers are able to get more information about that product through advertisement. The opposite condition leads to decrease in demand.

5. Weather: Weather also has a decisive effect on consumer’s demand. In colder areas, woolen clothes have a high demand but the same clothes have a low demand in warmer areas. Similarly, cold drinks are demanded more in summer but during winter their demand decreases.

6. Customs: Customs also affect the quantity demanded for a product. Goods related with customs have a positive relation with the demand for a specific festival or procession. Unrelated goods have a lesser demand.

7. Fashion: Fashion is another factor affecting the quantity demanded. Fashion related goods have positive relation with the demand. When the same product goes out of fashion, quantity demanded will decrease other factors of the same.

8. Taste and preferences of the consumer: The level of demand is also influenced by the tastes and preference of the consumers. Tastes and preference depend on social customs, habits and general lifestyle of the consumer. If a consumer has more taste and preference on particular goods, demand for a commodity increases and vice versa.

9. Number of consumers: Increase in the size of population means increase in the number of consumers, which will create a new demand.