Question

Explain in detail the determinants of demand.

Answer 1

The demand for goods is determined by the following factors:

1. Price: Price determines the demand for a commodity to a large extent. Consumers prefer to purchase a product in large quantities when the price of a product is less, and they purchase a product in small quantities when the price of a product is high.
2. Income: The income of a consumer decides purchasing power, which in turn influences the demand for the product. A rise in income will lead to an increase in demand for the commodity, and a fall in income will lead to a fall in demand.
3. Prices of Substitute Goods: If a substitute good is available at a lower price, people will demand cheaper substitutes than costly goods. For example, if sugar prices rise, demand for jaggery will increase.
4. Price of Complementary Goods: A change in the price of one commodity would also affect the demand for other commodities—for example, cars and fuel. If the price of fuel rises, then demand for cars will fall.
5. Nature of product: If a commodity is a necessity and its use is unavoidable, then its demand will continue to be the same irrespective of the corresponding price—for example, medicine to control blood pressure.
6. Size of the population: The larger the size of the population, the greater the demand for a commodity, and the smaller the size of the population, the smaller the demand for a commodity.
7. Expectations about future prices: If the consumer expects the price to fall, he will buy less at the prevailing price in the present. Similarly, if he expects the price to rise in the future, he will buy more in the present at the prevailing price.
8. Advertisement: Advertisement, sales promotion schemes, and effective salesmanship tend to change the preferences of consumers and lead to demand for many products, for example, cosmetics, toothbrushes, etc.
9. Tastes, Habits and Fashions: The taste and habits of a consumer influence the demand for a commodity. If a consumer likes to eat chocolates or consume tea, he will demand more of them. Similarly, when a new fashion hits the market, the consumer demands that particular type of commodity. If a commodity goes out of fashion then suddenly the demand for that product tends to fall.
10. Level of Taxation: High rates of taxes on goods or services would increase the price of the goods or services. This, in turn, would result in a decrease in demand for goods or services and vice-versa.
11. Other factors:
    1) Climatic conditions
    2) Changes in technology
    3) Government policy
    4) Customs and traditions etc.