What are the determinants of demand? |
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| Ans : The factors that causes change in the demand of goods and services is known as determinants of demand. Demand for goods and services depend upon many factors. They are explained below:
(i) Price of the commodity:- The most important determinants of demand is the price of it’s own commodity. When price of commodity decreases, it’s quantity demand increases and vice versa. It means there is inverse relationship between price and quantity demand.
(ii) Income of the consumer:- When there is change in income of the consumer, there is change in demand of the consumer. In cash of normal goods, quantity demand increases with increase in income and vice versa. In cash of inferior goods, quantity demand decreases with the increase in income and vice versa.
Normal Goods
Inferior Goods
(iii) Price of related goods:- The demand for goods is determined by price of related goods. There are two types of related goods they are:
a) Substitute goods:- In cash of substitutes goods, if there is increase in price of one goods then there is increase in demand of other goods and vice versa. For example, Tea and coffee, if the price of tea increases assuming price of coffee as constant, the demand for coffee will increase and vice versa.
b) Complementary goods:- In case of complementary goods, if there is rise in price of one goods then the demand for other goods will decrease and vice versa. For example, Bike and petrol, if the price of petrol increases, assuming the price of Bike constant, the demand for Bike will decrease.
(iv) Taste and preference of the consumers:- Demand depends on taste and preference of the consumer. If there is change in taste and preference of the consumer, there is change in demand of consumer.
(v) Advertisement:- Demand also depends upon advertisement. When advertisement of particular goods increases then it leads to increase in demand for goods and vice versa.
(vi) Consumer expectation:- If a consumer expects a rise in price of a commodity in future, he will demand more quantity of that commodity at high price. On the other hand, if consumer expect fall in price of a commodity in future, he will demand less quantities of that commodity.
(vii) Size and composition of population:- Demand also depends upon size of population in the market. A large number of populations will create more demand for goods and services. When the size of population increase then demand for necessary goods increases and vice versa.
Composition of population means the proportion of male, female, young, old people in a country. Age distribution of the population determines the demand. If population determines the demand. If population mostly consists of aged people, there will be more demand for medicine and health services.
(viii) Distribution of income in the society:- Distribution of income in the society also affects demand for goods. If the income is equally distributed among the people in the society, the demand for goods will be higher. Whereas if the income distribution is unequal then high income group would prefer luxury goods while the low income group would prefer necessary goods.
(ix) Availability of credit:- Availability of credit to the customer from sellers, banks, friends etc. encourages the consumer to buy more of the goods like television, car, furniture etc. show the availability of credit increases demand for durable goods.
(x) Climate and weather:- The demand for goods is also affected by climate and weather. The demand for warm clothes, hot drink, heater, etc. will increase in winter season. The demand for coldrink, ice-cream, etc. will increase in summer season.
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