Determinants of Demand

Determinants of Demand

We know that the demand for any commodity depends on the desire, consent and ability to pay the price. The desire to purchase depends on the preferences and interests of the individuals. Purchasing capacity depends on the purchasing power. Since there is always a need to distribute the scarce resources in the best possible manner, the consumer is influenced by many factors which determine the demand for a commodity. The important demand determinants are as follows:

1. Price of the commodity – The demand for a commodity is directly related to its price. When the price of the commodity is low, its demand increases and when the price is high, the demand decreases. Thus, in general we can say that the price of the commodity and its demand vary in opposite directions. When the price of the commodity decreases, the purchasing power of the consumer increases and he purchases more quantity of it. The entire law of demand is based on the concept of ‘high price low demand’ and vice versa.

Explanation-When the price of the commodity was one rupee, the demand was 400 units, whereas it kept decreasing with the increase in price and at four rupees the demand remained only 100 units.’

2. Consumer’s income- Demand is also affected by the amount of income of consumers. When income increases, a person spends a large part of the increased income mostly on the consumption of various goods, usually the family income and the quantity demanded move in the same direction. The relationship between income and demand is shown by the following figure

Even then the demand for some goods like fruits, vegetables etc. increases with income but after some income limit the quantity demanded of things does not change even if the income changes.

3. Price of related goods When the difference in the price of one commodity affects the demand of the other commodity. We say that both the goods are related to each other. The relationship can be of two types.

(i) Substitutes

(ii) Complements

Substitutes are goods which have similar uses. When the price of one good rises, it is possible that the demand for substitutes increases. For example, Limca and Miranda are similar lemon flavoured soft drinks. If the price of Limca rises, people will use more of Miranda. Other examples are apples and pears, tea and coffee, rail and road transport, etc.

Goods which are used together are called complements. An increase in the price of such a good will reduce the demand for its complement. Let us take the example of tennis racket and ball. If the price of tennis racket rises, fewer people will play tennis. As fewer people will participate, fewer tennis balls will be purchased. Some other examples of complementary goods are pen and ink, bread and butter, petrol and vehicles, etc.

4. Tastes and preferences-An important determinant of demand is tastes and preferences.  If the consumer’s interests and preferences are in favour of a product, the demand for that product will be high. On the other hand, if the consumer’s interests and preferences change and turn against the product, the demand for the product decreases. There was a time when gloves were considered essential for a well-dressed lady. Today gloves are usually worn on special occasions. This change in preferences causes the demand for gloves to decrease. Now let us take another example. If jeans gain popularity among consumers, the demand for a firm selling jeans will be higher than before. If jeans go out of fashion, the opposite will happen. Modern business firms adapt themselves to the changing trends and attractions in the market. They also try to influence demand through their sales campaigns.

5. Future expectations- Consumers have two types of expectations-

a. Expectations related to their future income and

b. Expectations related to future prices of related goods and goods.

If the consumer expects more income in future, he spends more in the present and then the demand for goods increases. If he expects less income in future then the situation will be just the opposite. Similarly, if the consumer expects the prices of the goods to increase in future then he will prefer to buy the goods now rather than later, this will increase the demand for the goods. On the contrary, when the prices are expected to decrease then the demand for the goods will stop increasing.