Determinants of Demand

Based on our discussion so far, we can say that the demand for a product largely depends on its price. But price is not the only factor that influences demand. The demand for a product also depends on factors such as income available with consumers for spending, price of related goods, expectations regarding future prices, consumer preferences, and the number of buyers in the market. The quantity of a product that consumers are willing and able to buy at any given price changes, if any of these factors change. Let us understand these factors in detail:

a. Income of the consumer

Income is an important factor influencing the consumer demand. The disposable income of an individual also determines demand. The higher the income more is the quantity demanded and vice versa. Products for which demand for goods is positively linked are called normal goods, and for those which it is negatively linked are called by economists as superior goods.

b. Price of the substitute product

A substitute product is one that provides the same level of satisfaction as the product already being consumed by the consumer. Assume that two products A and B are perfect substitutes for each other. If the price of a product A goes up, while B remains constant, demand for B will go up as consumers will switch from product A to B. We can think of tea and coffee as an example of substitute products.

c. Price of complementary product

Complementary products are products that are consumed together. For example, car and petrol or shoe and polish, etc. In this case, if the price of one product goes up the demand for the other product decreases.

d. Changes in policy

The demand of a particular product also depends upon government policies. For example, if the government increases taxes on products, prices increase and hence the demand decreases in the short run. Change in government policies may also have a negative impact on the demand for a particular product. For example, increase in tax on cigarettes may reduce the demand of this product.

e. Tastes and preferences of the consumer

The tastes and preferences of the consumer also affect the demand for a product. To an extent, prevailing fashion, advertising and an overall increase in standard of living influence consumer tastes.

f. Consumers’ Wealth

While considering the purchasing power of the consumer, current income is not the only factor that brings about a shift in the demand curve. The existing wealth of the consumer can be in the form of stocks, bonds, real estate, etc. which can be used to purchase goods.

g. Expectation regarding future price changes

If a consumer expects a fall in the price of a product in the near future, he may reduce his present consumption of that product. However, the extent to which he can reduce his present consumption depends on the nature of the product. If the product is essential or perishable one, the consumer cannot postpone his purchase. For example, if reduction of petrol prices is expected in near future, consumers tend to postpone their purchases. However, they can do it only for a certain period because petrol being a commodity of regular use, its requirement cannot be postponed for too long.

h. Special influence

Demand is also influenced by factors like climatic changes, demographic changes, etc. Certain factors may affect the demand only for a particular product. For example, the demand for woolen garments goes up only in winter. In India, the demand for cars is influenced by various factors like per capita income, introduction of new models, availability and cost of car financing schemes, price of other models of cars, prevailing duties and taxes, depreciation norms, fuel cost, public transport facilities, etc.

i. Number of Consumers

Another factor influencing demand is the number of potential buyers in the market. Clearly, the more number of consumers for the demand greater is the demand for the product. As more number of people are now wanting smart phones as a result the demand for it is increasing.

Let us look at an example of a normal good and how does the demand changes for it

Source: Microeconomics, 10e, 2012, Parkin


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