by The demand of a product is influenced by a number of factors. An organization should properly understand the relationship between the demand and its each determinant to analyze and estimate the individual and market demand of a product.
The demand for a product is influenced by various factors, such as price, consumer’s income, and growth of population.
For example, the demand for apparel changes with change in fashion and tastes and preferences of consumers. The extent to which these factors influence demand depends on the nature of a product.
An organization, while analyzing the effect of one particular determinant on demand, needs to assume other determinants to be constant. This is due to the fact that if all the determinants are allowed to differ simultaneously, then it would be difficult to estimate the extent of change in demand.
Demand is fluctuating time to time. There are majorly six factors which affect the demand for a commodity (Product).
Determinants of Demand Mean
- Consumer preferences
Personality characteristics, occupation, age, advertising, and product quality, all are key factors affecting consumer behavior and, therefore, demand.
- Prices of related products
An increase in the price of one product will cause a decrease in the quantity demanded of a complementary product. In contrast, an increase in the price of one product will cause an increase in the demand for a substitute product.
- Consumer income
The higher the consumer income, the higher the demand and vice versa.
- Consumer expectations
Expectations for a higher income or higher prices increase the quantity demanded. Expectations for a lower income or lower prices decrease the quantity demanded.
- The number of buyers
The higher the number of buyers, the higher the quantity demanded, and vice versa.
- Other factors
The weather and governmental policies that may expand or contract the economy affect the demand for particular products or services.
The determinants of demand for a product:
(a) Price of a Product or Service
Affects the demand of a product to a large extent. There is an inverse relationship between the price of a product and quantity demanded. The demand for a product decreases with increase in its price, while other factors are constant, and vice versa.
For example, consumers prefer to purchase a product in a large quantity when the price of the product is less. The price-demand relationship marks a significant contribution in oligopolistic market where the success of an organization depends on the result of price war between the organization and its competitors.
(b) Income
Constitutes one of the important determinants of demand. The income of a consumer affects his/her purchasing power, which, in turn, influences the demand for a product. Increase in the income of a consumer would automatically increase the demand for products by him/her, while other factors are at constant, and vice versa.
For example, if the salary of Mr. X increases, then he may increase the pocket money of his children and buy luxury items for his family. This would increase the demand of different products from a single family. The income-demand relationship can be analyzed by grouping goods into four categories, namely, essential consumer goods, inferior goods, normal goods, and luxury goods.
(c) Tastes and Preferences of Consumers
Play a major role in influencing the individual and market demand of a product. The tastes and preferences of consumers are affected due to various factors, such as life styles, customs, common habits, and change in fashion, standard of living, religious values, age, and sex.
A change in any of these factors leads to change in the tastes and preferences of consumers. Consequently, consumers reduce the consumption of old products and add new products for their consumption. For example, if there is change in fashion, consumers would prefer new and advanced products over old- fashioned products, provided differences in prices are proportionate to their income.
Apart from this, demand is also influenced by the habits of consumers. For instance, most of the South Indians are non-vegetarian; therefore, the demand for non- vegetarian products is higher in Southern India. In addition, sex ratio has a relative impact on the demand for many products.
For instance, if females are large in number as compared to males in a particular area, then the demand for feminine products, such as make-up kits and cosmetics, would be high in that area.
(d) Price of Related Goods
Refer to the fact that the demand for a specific product is influenced by the price of related goods to a greater extent.
Related goods can be of two types, namely, substitutes and complementary goods, which are explained as follows:
- Substitutes: Refer to goods that satisfy the same need of consumers but at a different price. For example, tea and coffee, jowar and bajra, and groundnut oil and sunflower oil are substitute to each other. The increase in the price of a good results in increase in the demand of its substitute with low price. Therefore, consumers usually prefer to purchase a substitute, if the price of a particular good gets increased.
- Complementary Goods: Refer to goods that are consumed simultaneously or in combination. In other words, complementary goods are consumed together. For example, pen and ink, car and petrol, and tea and sugar are used together. Therefore, the demand for complementary goods changes simultaneously. The complementary goods are inversely related to each other. For example, increase in the prices of petrol would decrease the demand of cars.
(e) Expectations of Consumers
Imply that expectations of consumers about future changes in the price of a product affect the demand for that product in the short run. For example, if consumers expect that the prices of petrol would rise in the next week, then the demand of petrol would increase in the present.
On the other hand, consumers would delay the purchase of products whose prices are expected to be decreased in future, especially in case of non-essential products. Apart from this, if consumers anticipate an increase in their income, this would result in increase in demand for certain products. Moreover, the scarcity of specific products in future would also lead to increase in their demand in present.
(f) Effect of Advertisements
Refers to one of the important factors of determining the demand for a product. Effective advertisements are helpful in many ways, such as catching the attention of consumers, informing them about the availability of a product, demonstrating the features of the product to potential consumers, and persuading them to purchase the product. Consumers are highly sensitive about advertisements as sometimes they get attached to advertisements endorsed by their favorite celebrities. This results in the increase demand for a product.
(g) Distribution of Income in the Society
Influences the demand for a product in the market to a large extent. If income is equally distributed among people in the society, the demand for products would be higher than in case of unequal distribution of income. However, the distribution of income in the society varies widely.
This leads to the high or low consumption of a product by different segments of the society. For example, the high income segment of the society would prefer luxury goods, while the low income segment would prefer necessary goods. In such a scenario, demand for luxury goods would increase in the high income segment, whereas demand for necessity goods would increase in the low income segment.
(h) Growth of Population
Acts as a crucial factor that affect the market demand of a product. If the number of consumers increases in the market, the consumption capacity of consumers would also increase. Therefore, high growth of population would result in the increase in the demand for different products.
(i) Government Policy
Refers to one of the major factors that affect the demand for a product. For example, if a product has high tax rate, this would increase the price of the product. This would result in the decrease in demand for a product. Similarly, the credit policies of a country also induce the demand for a product. For example, if sufficient amount of credit is available to consumers, this would increase the demand for products.
Climatic Conditions
Affect the demand of a product to a greater extent. For example, the demand of ice-creams and cold drinks increases in summer, while tea and coffee are preferred in winter. Some products have a stronger demand in hilly areas than in plains. Therefore, individuals demand different products in different climatic conditions.
Demand Function
The demand function shows the relation between the quantity demanded of a commodity by the consumers and the price of the product. These functions are probably the most important tools used by economists. While many variables determine the quantity consumers wish to purchase in a market, the price of the commodity is perhaps the most important one.
In this context, we may distinguish between individual demand and market demand. The former refers to the quantity of a good that an individual stands ready to buy at each of several prices, at a particular time, under given conditions.
The latter consists of the total quantity of a good that would be bought in the aggregate by individuals and firms, at each of the various prices, at a fixed point of time. The demand schedules may be graphed or shown in a tabular form. When a demand schedule is graphed, it is called the demand curve.
A demand function is a list of prices and the corresponding quantities that individuals are willing and able to buy at a fixed point of time. We may note at the outset that demand is a function (or schedule), not a specific quantity. It is formally defined as a schedule of the total quantities of a commodity or service that will be purchased at various prices at a particular point of time.
Hence when we refer to the demand for meat or the demand for motors cars in India, we are considering the amounts that consumers are willing and able to purchases at various prices.
The word ‘demand’ is a broad concept referring to the entire schedule of quantities and prices. But the term ‘quantity demanded’ refers to a single point on the demand schedule or curve. It shows the maximum quantity demanded at a particular price.
We generally specify consumer demand in any of the three ways: as a schedule, a graph, or a function. This table shows the list of prices and the corresponding quantities that the consumers demand per unit of time (a day or a week).
|
Market Demand Schedule |
|
| Quantity demanded
(Units) |
Price per Unit (Rupees)
Rs. |
| 2,000 | 6 |
| 3,000 | 5 |
| 4,000 | 4 |
| 5,000 | 3 |
| 5,500 | 2 |
| 6,000 | 1 |
Quite often it is more convenient to work with the graph of a demand schedule, called a demand curve, rather than with the schedule itself. Figure shows the demand curve which is a graphical representation of the demand schedule presented in Table. Each price-quantity combination (Rs. 6, 2,000), (Rs. 5, 3,000), and so on is plotted. The locus of such points (each one showing a particular combination of p and q) DD’ is the demand curve.
The demand curve indicates the quantity of the good consumers are willing and able to buy at a fixed point of time at alternative prices, i.e., at every price from Rs. 6 to Rs. 1. Since price and quantity demanded are inversely related, the curve slopes downward.
Indeed, all market demand curves (which are arrived at by adding up demand curves of individual consumers) are downward sloping because of the law of demand. Individuals purchase less when price rises. Furthermore, as price increases, some individuals do not purchase anything at all, again causing the quantity demanded at each price to fall.
Alternatively, we can express demand as a function
Qx = ƒ(Px)
In this function, the other variables (income, and so on) are held constant. The quantity demanded of a commodity is a function of the price of the good, holding constant the other (proximate) determinants of demand.
