7 Most Important Non-Price Determinants of Demand in the Theory of Demand

Apart from price, there are some other determinants of demand, called non- price determinants of demand.

Now we consider these factors one by one:

1. Income:

Income of consumers partly determines the quantity of goods and services he is willing to and capable of purchasing because change (increase/decrease) in income of the consumers, changes (increases/decreases) the purchasing power of the customers, provided all other determinants remains the same.

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The effect of rise in income on change in demand is represented by a shift of demand curve from DD to D₁D₁, (figure 3.5). This is applicable to the normal goods only. But for inferior goods (for such goods demand falls with increase in income), this general cause-effect relationship does not hold. With the hike in income, the consumers abandon the use of inferior goods and instead, purchase higher quality substitutes (figure 3.6).

2. Price of Substitutes:

For close substitutes, the rise in price of one commodity will increase the demand for the other. If the price of a product increases, the existing customers of that product will prefer to purchase the substitute. As a result, demand for the product in consideration is expected to fall (figure 3.7). For example, if the fare of underground Figure 3.7 railway transport increases, more people will prefer to travel by buses and trams and vice-versa.

3. Price of Complementary Goods:

When one commodity is essential for the consumption or use of another commodity, each of these commodities in consideration are called complementary goods with respect to the other. For complementary goods with respect to the other, increase/decrease in price of one also decreases/ increases the demand of the other goods.

Consider the case of tea and sugar. If price per kg of tea increases, people will obviously reduce its consumption (according to the law of demand). As a result, demand of tea is likely to be reduced.

As sugar is used to prepare tea, total demand for sugar will also be reduced with the fall in the demand of tea (figure 3.8). Thus, an increase in price of a commodity not only leads to reduction in Figure 3.8 quantity of that product demanded, but also leads to a reduction in price of its complements.

4. Seasonal Conditions:

The demand for certain items gets influenced by the climatic conditions. For example, in summers the demand for talcum powder increases leading to a rightward shift in the demand curve. Similarly, the demand for umbrella increases during the rainy season Figure 3.9 (figure 3.9).

5. Expectations:

Expectation of future price of goods and service, plays a vital role in the purchase decision of consumers. Those who expect a high income in the near future will start spending more than those who expect a smaller income in the future (figure 3.10).

Similarly, people often increase consumption (and hence purchase) of those goods whose prices are expected to rise sharply in the coming months. This also causes rightward shift of its demand curve.

6. Population:

If the population of the target group of customers increases, total demand for product under consideration also increases (figure 3.11). For example, in cities with growing population, the demand for housing increases.

7. Tastes and Preferences:

Tastes and preferences of consumers influence their demand for a commodity. Usually, we consider this to be static, but it changes with the change in trends or as a result of imitating others. If people start liking a particular product, the demand curve of the product shifts to the right (from DD to D₁ D₁ as shown in figure 3.12).

When a product becomes outdated, the customers start purchasing more trendy models or improved versions of the product and consequently, the demand curve for the outdated product shifts in the leftward direction (like DD to D₂ D₂ as shown in figure 3.12).

In this context, it should also be mentioned that for necessities such shift is unlikely to take place, because it is not possible to curtail consumption of necessity items. For example, in case of salt, imposition of tax on it can hardly reduce its total sales because no one consumes salt in excess of his/her requirement and hence there remains no scope of reducing consumption.

Some of the changes in selected independent variables and their effects on the demand curve are summarized in the following table:

The determinants of demand mentioned above are the main factors in determining volume of sales. The set of determinants varies from product to product. It should also be noted that the determinants of demand are not restricted to those which are mentioned here.

In reality, there are infinitely large number of determinants of demand most of which can hardly be identified. It may so happen that an apparently negligible factor plays the most significant role in creating demand for a product. The success of LML Freedom is a case where a non-traditional determinant played a crucial role in creating demand.