Determinants of demand
Demand for a commodity depends upon many factors. Factors determining the demand for a commodity are known as determinants of demand. The important determinants or factors affecting the demand are as follows:
1. Price of the commodity: The most important determinant of demand is the price of the same commodity. When the price of a commodity falls, its quantity demanded will increase and vice-versa. It means that there is an inverse relationship between the price and quantity demand for the commodity.
2. Income of the consumer: Demand for a commodity change when the income of the consumer changes. In the case of normal goods, when the income of the consumer rises, the demand also increases and vice versa. But, in the case of inferior goods, the demand for the commodity decreases with the rise in income and vice-versa. It means that there is a positive relationship between income and demand for normal goods and an inverse relationship between income and demand for inferior goods. For example, branded clothes kept to sell in shopping complexes are normal goods whereas low-quality clothes kept in streets to sell are inferior goods.
3. Prices of the related goods: The demand for a commodity is also determined by the change in the prices of related goods. There are two types of related goods, which are as follows:
a) Substitute goods: Those goods are substitute goods, in which one can be used in absence of another. In the case of these goods, if the price of one rises, the demand for another rises and vice-versa. For example, tea and coffee are substitute goods. If the price of tea increases, assuming the price of coffee is constant, the demand for coffee will increase and vice-versa.
b) Complementary goods: Those goods are complementary goods, which are jointly used to satisfy a particular want. In the case of these goods, if there is a rise in the price of one good, assuming the price of a related good constant, the demand for other goods will fall and vice-versa. For example, pen and ink. If the price of a pen rises, the demand for ink will fall and vice versa.
4. Taste and preference of the consumer: Demand also depends on the taste and preference of the consumer. The change in consumer's tastes and preferences causes a change in demand for goods. If the taste and preference of a commodity are in favor of the consumer, the demand for that commodity will increase and vice-versa.
5. Advertisement: There is a great impact of advertisement. Goods, which are widely advertised, become popular and consumers are attracted to those goods. People can also take more information about various goods from the advertisement. As a result, the demand for those goods increases.
6. Income distribution: The distribution of income in society also affects the demand for goods. If the distribution of income is more equal, then the propensity to consume of the society will be relatively high. As a result, demand for goods increases. If the distribution of income is more unequal, the propensity to consume will be relatively low. As a result, demand for goods decreases. If income distribution is in favor of the rich, demand will be low. If income distribution is in the favor of the poor, demand will be high.
7. Size and composition of population: The size of the population also affects the demand for goods and services. When the size of the population increases, the demand for necessaries of life also increases and vice versa. The composition of population means the proportion of young, old and children as well as the ratio of men to women. The composition of the population also affects the composition of demand. For example, if the population of elderly people increases, the demand for medicine will increase.
8. Consumer's expectation: If a consumer expects a rise in the price of a commodity in the near future, he will demand more quantities of that commodity at the present time so that he should not have to pay a higher price in the future. Similarly, if the consumer expects he will have a good income in the future, he will spend the greater part of his income at present time. As a result, his present demand for goods will increase.
9. The availability of credit: Nowadays, the demand for many durable consumer goods like cars, furniture, television, and other types of household equipment depends very much on the provision of credit facilities. Such credit facilities are provided by the banking sector on a monthly installment basis. If there is any change in terms of this type of finance, there will be a marked effect on demand for such types of goods.
10. Climate and weather: The demand for goods is also affected by the climate and weather. In the winter season, the demand for warm clothes will rise and during the summer, the demand for cotton clothes will rise. Similarly, there will be high demand for umbrellas and rain coats during the rainy season.
a) Substitute goods: Those goods are substitute goods, in which one can be used in absence of another. In the case of these goods, if the price of one rises, the demand for another rises and vice-versa. For example, tea and coffee are substitute goods. If the price of tea increases, assuming the price of coffee is constant, the demand for coffee will increase and vice-versa.
b) Complementary goods: Those goods are complementary goods, which are jointly used to satisfy a particular want. In the case of these goods, if there is a rise in the price of one good, assuming the price of a related good constant, the demand for other goods will fall and vice-versa. For example, pen and ink. If the price of a pen rises, the demand for ink will fall and vice versa.
4. Taste and preference of the consumer: Demand also depends on the taste and preference of the consumer. The change in consumer's tastes and preferences causes a change in demand for goods. If the taste and preference of a commodity are in favor of the consumer, the demand for that commodity will increase and vice-versa.
5. Advertisement: There is a great impact of advertisement. Goods, which are widely advertised, become popular and consumers are attracted to those goods. People can also take more information about various goods from the advertisement. As a result, the demand for those goods increases.
6. Income distribution: The distribution of income in society also affects the demand for goods. If the distribution of income is more equal, then the propensity to consume of the society will be relatively high. As a result, demand for goods increases. If the distribution of income is more unequal, the propensity to consume will be relatively low. As a result, demand for goods decreases. If income distribution is in favor of the rich, demand will be low. If income distribution is in the favor of the poor, demand will be high.
7. Size and composition of population: The size of the population also affects the demand for goods and services. When the size of the population increases, the demand for necessaries of life also increases and vice versa. The composition of population means the proportion of young, old and children as well as the ratio of men to women. The composition of the population also affects the composition of demand. For example, if the population of elderly people increases, the demand for medicine will increase.
8. Consumer's expectation: If a consumer expects a rise in the price of a commodity in the near future, he will demand more quantities of that commodity at the present time so that he should not have to pay a higher price in the future. Similarly, if the consumer expects he will have a good income in the future, he will spend the greater part of his income at present time. As a result, his present demand for goods will increase.
9. The availability of credit: Nowadays, the demand for many durable consumer goods like cars, furniture, television, and other types of household equipment depends very much on the provision of credit facilities. Such credit facilities are provided by the banking sector on a monthly installment basis. If there is any change in terms of this type of finance, there will be a marked effect on demand for such types of goods.
10. Climate and weather: The demand for goods is also affected by the climate and weather. In the winter season, the demand for warm clothes will rise and during the summer, the demand for cotton clothes will rise. Similarly, there will be high demand for umbrellas and rain coats during the rainy season.
Post a Comment
If this article has helped you, please leave a comment.