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Determinants of Demand

Updated on January 25, 2024
Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

What are the Determinants of Demand?

Demand is an economic principle that explains the relationship between prices and consumer behaviors due to changes in goods and services. Although many economic factors affect the demand for goods and services, those factors are called determinants of demand.

Key Takeaways

  • The term “determinants of demand” refers to these variables, which influence demand for products and services despite numerous economic factors.
  • The economic principle of demand demonstrates the relationship between prices and consumer behavior as a result of changes in goods and services. 
  • The top ten determinants of demand are the prices of goods or services, the price of complementary/substitute goods and services, buyer’s tastes and preferences, buyers’ expectations of the good’s future price, changes in buyers’ real incomes or wealth, number of buyers, government policies, climate changes, and income distribution.
  • All business firms should consider making their marketing strategies, which are opted for by all new businesses, to launch their products in the market.

Top 10 Determinants of Demand for an Economy

#1 – The Prices of Goods or Services

When the price of goods and services rises, the quantity demanded falls. When the price of goods and services falls, the quantity demanded will increase. It is also called the Law of Demand Law Of DemandThe Law of Demand is an economic concept that states that the prices of goods or services and the quantity demanded are inversely related when all other factors remain constant. In other words, when the price of a product rises, its demand falls, and when its price falls, its demand rises in the market.read more.

If demand does not change even in the price change, that is called inelastic demand. On the other hand, elastic demand is called if the quantity demanded changes more than the price change.

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#2 – Price of Substitute/Complementary Goods & Services

Substitute goods are goods that satisfy the same needs. For example, groundnut oil-sunflower oil and tea-coffee are substitutes. Hence, a rise in groundnut oil price can increase the demand for sunflower oil and vice-versa.

Complementary goods[/wsm-tooltip are those goods consumed together. For example, car and diesel or tea and sugar, so the vehicle price decreases the demand for diesel and car.

#3 – Buyers’ Tastes and Preferences

The demand for any product can change based on buyers’ tastes and preferences; brand advertising plays a vital role in changing buyers’ tastes and preferences. For example, earlier, people thought chocolates were mainly for kids. But the advertising industry has changed this concept by showing that chocolates are for everyone from kids to very older adults.

Likewise, they always come up with new trends in the market that influence the customers and ultimately impact the demand for those products.

#4 – Buyers’ Expectations of the Goods’ Future Price

When people expect the price of something to rise in the future, they tend to buy those products more, increasing demand for those goods. For example, when people expect gold to grow, they will buy more and more gold and vice versa.

The same happened in the housing bubble in 2015 when house prices rose. People bought houses aggressively; however, people were not buying homes despite lower house prices when the process started falling during the [wsm-tooltip header="Economic Recession" description="Economic recession is when economic activity is stagnant, and there is a contraction in the business cycle, over-supply of goods compared to its demand, and a higher unemployment rate resulting in lower household savings and lower expense, inflation, higher interest rate and economic crisis due to higher fiscal deficit." url="https://www.wallstreetmojo.com/economic-recession/"]economic recessionComplementary GoodsA complementary good is one whose usage is directly related to the usage of another linked or associated good or a paired good i.e. we can say two goods are complementary to each other. read more.

#5 – A Change in Buyers’ Real Incomes or Wealth

Buyers’ purchasing power is dependent on their incomes and wealthWealthWealth refers to the overall value of assets, including tangible, intangible, and financial, accumulated by an individual, business, organization, or nation.read more. Suppose we see it in the non-developed areas where jobs are not easily available, and people do not have much income. Hence, the demand for goods and services is much lower than the developed cities like New York, where many jobs are available. Therefore, people have good income and purchasing power, and demand for goods and services is high.

That can be very easily distinguished in the case of luxurious goods in the cities where more jobs are available. Therefore, demand for luxury goods is always higher than in cities where job opportunities are lesser. Thus, consumption is based not only on income but also on higher consumption and vice versa.

#6 – Buyers’ Expectations of their Future Income and Wealth

The higher expectation of future income & wealth increases consumption, and a lower expectation of future revenue will reduce consumption.

For example, students who will complete higher studies and are about to join the job will start spending more than the salaries of people who will retire in the coming years.

#7 – The Number of Buyers

If there is an increase in the number of buyers willing to buy goods or services affects the overall demand. The population has a large influence on the market. Population increase can create a makeshift in the demand curve.

The new buyers help raise the quantity demand, so demand changes even if the price does not change.

#8 – Government Policies

For many products, demand is dependent on government policies. For example, a decrease in the borrowing interest rate leads to raising housing loanLoanA loan is a vehicle for credit in which a lender will give a sum of money to a borrower or borrowing entity in exchange for future repayment.read more demands because people will start buying houses since the loan interest rate is reduced.

Another example is the U.S. government has banned a few models of Volkswagen due to pollution issues. Hence, there is no demand for those models in the U.S. taxation affects product demand. A rise in tax leads to an increase in product prices, leading to a decrease in the need for that product.

#9 – Climate Changes

There are many products for which demand is seasonal or dependent on the climate.

For example, demand for winter clothes is high in the winter season, and demand for ice creams is higher in the summer season. So, when winter is going to end, and there is no need for winter clothes, companies sell winter clothes at discounted prices. There are discount sales in the shops and malls after the season ends. This discounted offer helps the sellers to increase the demand.

#10 – Income Distribution

Luxurious goods are high in the area where very rich people are staying. On the other hand, in non-developed places where middle-income groups people visit, the demand for luxury goods is less.

Determinants of Demand

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Source: Determinants of Demand (wallstreetmojo.com)

#1 – Demand Equation

Quantity Demand (QD) = f (Prices of goods or services, price of substitute/complementary goods and services, buyers’ tastes and preferences, buyers’ expectations of the goods’ future price, change in buyers’ real incomes or wealth, buyers’ expectations of their future income and wealth, the number of buyers, government policies and climate changes, income distribution).

#2 – Upward & Downwards Shift in the Demand Curve

Below diagram (i) represent an upward shift in the demand, and (ii) represents a downward shift in the demand curveDemand CurveDemand Curve is a graphical representation of the relationship between the prices of goods and demand quantity and is usually inversely proportionate. That means higher the price, lower the demand. It determines the law of demand i.e. as the price increases, demand decreases keeping all other things equal.read more. It represents the change in demand for goods and services consumed at a given price.

When demand is increased, it means the demand curve will shift to an upward/right shift,

Determinants of Demand 1

And if demand is decreased, the demand curve will shift downward/left.

Determinants of Demand 2

Conclusion

All these demand determinants are important. All business firms should consider making their marketing strategies, which are considered by all new businesses, to launch their products in the market.

Frequently Asked Questions (FAQs)

Do price is the only determinant of demand?

No. The price is one of many determinants of demand. Therefore, the change in price does not create demand due to an increase or decrease.

What are the non-price determinants of demand?

The non-price determinants of demand are consumer needs and income, customer fashions, tastes and preferences, brand integrity, habits, prices of substitute and complementary goods, rational knowledge, behavioral economics, individual psychology, and choice architecture.

What are the determinants of demand for wheat?

The growing world population, land productivity, climate conditions, geo-political aspects, government interference, income growth in developing countries, substitutes, US dollar value, and investor opinions are the determinants of demand for wheat.

What are the four determinants of demand elasticity?

The four determinants of demand elasticity are substitutes availability, whether the good is an essential or luxury, the income proportion used on the good, and how much time is passed when the price changes. 

This article is a guide to the Determinants of Demand and its definition. We discussed the top 10 determinants that derive demand in an economy with examples. You can learn more about Excel Modeling from the following articles: –

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