The main determinants of demand are as follows:
Determinants
1. Price of the product:
The price of commodity or services directly affects its demand. According to the ‘Law of Demand’ the quantity demanded of a commodity changes in the opposite direction to change in its prices other things remaining unchanged.
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In other words the fall in the price of a commodity leads to rise in its demand and rise in price leads to fall in its demand when income, price of related goods, consumer’s taste and preferences, etc. remain unchanged.
Price is the only determinant of demand in the short-run. The impact of change in price and demand can be ascertained with the help of ‘price elasticity of demand’.
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2. Price of related goods:
Two or more goods can be complementary or substitutes of each other. The demand for a commodity is also affected by changes in price of its complementary or substitute good.
If two goods are substitute for each other then the increase in price of one will result in increased demand for the other and vice-versa.
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Suppose A and B commodities arc substitute of each other. The rise in the price of B increases demand for A and vice-versa.
Complementary goods are those which are jointly demanded to satisfy a particular demand. There is opposite relationship between price of one complementary commodity and the amount demand of the other complementary commodity.
If price of one complimentary rises, the demand for the other complementary falls. The impact on the demand of a commodity as a result of change in the price of related commodity can be known by cross elasticity of demand.
3. Level of income:
Income determines the purchasing power of the consumer. Therefore, income is an important determinant of demand for a commodity, ordinarily, with an increase in income, demand for goods increase.
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However, it may not always be true. Increase in the level of income affect the demand of necessaries, normal goods, luxuries and inferior goods differently.
(i) A large share of income is spent on necessaries when income of the consumer is law. The quantity demand of necessaries increases with increase in consumer’s income only upto a certain level of income.
(ii) The demand for normal goods (clothing, furniture, automobiles, etc.) increases rapidly upto a certain level of income but offer this demand increases at a slower rate. For these incomes elasticity of demand is positive.
(iii) Upto a certain level of income (when the income is law) there may not be any demand of luxuries and articles of distinction. As the income increases beyond a level, then demand for these goods increases with every increase in income.
(iv) In case of inferior goods, the demand is inversely related to the level of income. When income of a person increases, he prefer to use better quality goods and gives up the use of inferior goods.
At a very low level of income a consumer buys more quantity of inferior goods but beyond a certain level of income, he purchases lesser and lesser quantity of these goods with every increase in income.
While analyzing the demand of a commodity, demand analyst must keep this categorization of goods in mind. Impact of income on demand is measured by income elasticity.
4. Taste and preferences of consumer:
The amount demanded also depends an consumer’s taste and preferences. Taste and preferences changes with change in fashion, habits, customs and traditions and general life-style of the society.
If the taste and preferences for a commodity increases, its amount demanded is more even at the same price.
5. Future trend of Prices:
If it is expected that in future the price of a commodity will go up the demand for the commodity in the present also will go up. If the prices are expected to fall then the demand would fall.
6. Changes in Population:
Generally the demand for a commodity increases with increase in size of population, other things being equal.
It is not merely the change in the size of population but the changes in the composition of population also affect the demand for certain commodities.
In a country of increasing population like India where hundreds of children’s are born daily in big cities there will naturally be demand for toys, baby food, feeding bottles and alike.
7. State of business:
If the country is passing through prosperity and boom conditions, there will be a marked increase in demand.
When the country is passing through recession and depression then level of demand would go down.
8. Distribution of income and wealth:
If the distribution of income is more equal then the demand for all normal goods will be more. If the income is so unevenly distributed that majority of population is poor then the demand for inferior and necessaries will be larger.
9. Availability of consumer credit:
If the credit facilities are available sufficiently to consumers for the purchase of high priced durable goods such as car, colour TV., scooters and alike, then their demand will increase.
The business analyst should keep this factor in mind while forecasting demand of durable goods.
10. Propensity to save:
Demand for goods is affected by change in propensity to save. Increase in propensity save means less money is available for the purchase of goods. The demand, therefore, will decrease with increase in propensity to save.
11. Advertisement expenditure:
Increase in advertisement expenditure upto a certain stage, increase the demand rapidly by influencing consumers’ choice and preferences, and setting new fashion trends.
To what extent the increased advertisement expenditure increases demand depends on the expenditure incurred an advertisement by rival firm.
But generally advertisement expenditure leads to increase in demand by creating want for the commodity among people. Advertisement manipulates demand.
12. Others:
There are other factors such as demonstration effect, product improvement; educational standard, etc. affect the demand.