What are the Determinants of Demand?
Demand is an economic principle, which explains the relationship between the prices and the consumer behaviors due to change in the price for goods & services; There are many factors in the economy which affects the demand for goods & services, those factors are called determinants of demand.
Top 10 Determinants of Demand for an Economy
#1 – The Prices of Goods or Services
When the price of goods & services rises, the quantity demand falls & when the price of goods & services falls, the quantity demand will rise. It is also called the Law of demandLaw 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..
If demand doesn’t change even in the change in price that is called inelastic demand & if quantity demand changes more than the change in price that is called elastic demand.
#2 – Price of Substitute/Complementary Goods & Services
Substitute goods are goods that satisfy the same needs. For example, Groundnut oil & Sunflower oil, tea & coffee are substitutes to each other hence rise in the price of Groundnut oil can increase the demand for Sunflower oil & vice-versa.
Complementary goods are those goods which are consumed together For example, Car & Diesel or Tea & sugar so the rise in the price of Car & decreases the demand for both Diesel & Car.
#3 – Buyers’ Tastes and Preferences
The demand for any products can change based on buyer’s tastes & preferences, brand advertising plays a vital role in changing the buyer’s tastes & preferences. For example, earlier people used to think chocolates are mainly for kids but the advertising industry has changed this concept by showing that chocolates are for everyone from kids to very elderly person.
Likewise, they always come up with new trends in the market which influence the customers & that have the ultimate impact on the demand of those products.
#4 – Buyers’ Expectations of the Goods’ Future Price
When people expect the price of something to rise in future they tend to buy those products more which lead to an increase in demand for those good. For example, when people expect the price of Gold to rise they will buy more & more gold & vice versa.
‘The same has happened in the housing bubble in the year 2015 when house prices were raising people bought houses aggressively however when the process started falling at the time of economic recessionEconomic RecessionEconomic recession is when economic activity is stagnant, and there is 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. people were not buying houses in spite of lower house prices.
#5 – A Change in Buyers’ Real Incomes or Wealth
Buyer’s purchasing power is dependent on their incomes and wealth, if we see in the non-developed areas where jobs are not easily available so people don’t have much income hence, the demand for goods & services is much lower as compared to the developed cities like New York where many jobs are available hence people has good income & purchasing power and demand for goods & services is high.
That can be very easily distinguished in the case of luxurious goods in the cities where more jobs are available demand for luxurious goods is always higher compared to the cities where job opportunities are lesser. The consumption is not only based on income but also it is based on wealth higher consumption & vice versa.
#6 – Buyers’ Expectations of their Future Income and Wealth
The higher expectation of future income & wealth increases the consumption & lower expectation of future income will reduce consumption.
Example, Students who are going to complete the higher studies & is about to join the job will start spending more as compared to salaries person who is going to retire in the coming years.
#7 – The Number of Buyers
If there is an increase in the number of buyers who are willing to buy goods or services affects the overall demand. The population has a large influence on demand. Population increase can makeshift demand curve.
The new buyer’s help to raise the quantity demand so in this case demand changes even if the price doesn’t change.
#8 – Government Policies
For many products, demand is dependent on government policies. For example, Decrease in the borrowing interest rate leads to raising in the housing loan demands because people will start buying houses since the loan interest rate is reduced.
Another example, the US government has banned a few models of Volkswagen due to pollution issues hence there is no demand for those models in the US. Taxation also affects the demand for products, a rise in tax leads to an increase in products price which leads to a decrease in the demand for that product.
#9 – Climate Changes
There are many products for which demand is seasonal or demand is dependent on the climate.
For example, demand for winter clothes is high in the winter season, demand for Ice –creams are higher in summer seasons. When winter is going to end & there is no demand for winter clothes company’s sale winter clothes with discounted prices hence after the season end there are discount sales in the shops & malls. This discounted offer helps the sellers to increase the demand.
#10 – Income Distribution
In the area where very rich people are staying, the demand for luxurious goods is high whereas in non-developed areas where middle-income group people are staying there a demand for luxurious goods is less.
#1 – Demand Equation
Quantity Demand (qD) = f(Prices of goods or services, Price of substitute/complementary goods & 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 & Climate changes, Income distribution)
#2 – Upward & Downwards Shift in the Demand Curve
Below diagram (i) represent an upward shift in the demand & (ii) represent 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.. This basically represents the change in demand for goods & services consumed at a given price.
When demand is increased that means the demand curve will shift to upward/right shift,
And if demand is decreased that means the demand curve will shift downward/left.
All these demand determinants are important & all business firms should take into consideration for making their marketing strategies, those are taken into consideration by all new businesses in terms of launching their products in the market.
This has been a guide to What are the Determinants of Demand and its Definition. Here we discuss the top 10 determinants that drive demand in economy and products along with examples. You can learn more about excel modeling from the following articles –