5 Major Determinants of Demand
Before reading about the demand for the products, we have to study what demand is. Demand is the need and the requirement of the products by an individual. This need and demand depend upon the factors that influence the conditions such as taste and preference of the consumers, the income of the consumers. In this article, we will study the determinants of demand in brief.
It is the role of the organisation to know the connection between the demand and the determinant of demand so that they can analyse and have an idea about the demand of an individual in the market. Various factors influence the demand in the market such as the income of the consumer, prices of the product and population growth in the economy.
But if we are considering a particular determinant for the analysis of the demand, we have to assume the other factors to be constant so that there can be better analysis of the demand for the product. The reason behind this is that if we are considering all the factors to be variable, we will not reach any result or conclusion.
Following are the determinants of demand:
- PRICES OF THE COMMODITIES
The prices affect the demand largely. According to the law of demand, the demand and the price have an inverse relationship. If the demand of a product increases, there will fall in the prices, and if the demand of a product or service decreases, there will be a rise in the prices while other factors remain constant in this situation.
- INCOME OF THE INDIVIDUAL
Income of the individual also affects the demand. The purchasing power of the people depends highly on their income. More the income, more will be the purchasing power, less the income low will be the purchasing power. Thus, the demand for the product will be influenced by the demand for the product. But we have to assume the other factors as constant in case the income is variable in this case. The relationship between demand and income is positive. The income is affected by inflation to know how, read the theoretical approach to knowing the causes of inflation.
Here we will discuss the four types of goods and their relation to the income:
- Basic commodities
These are the goods that are consumed by everyone in the society. Like flour, oils, soaps, detergents etc. In case of a rise in income, the demand of individual for these goods will also increase. But there will be a limit for this demand and the other factors will be constant.
- Goods referred to as normal goods
These are the goods the demand for which increases with the increase in the income. When we talk about clothes, we would like to purchase more clothes if we have more money. But there is variation in demand as the prices of clothes differ, and people would buy it as per their potential.
- Substandard goods
These good have a negative or inverse relationship with the income. For example, if the consumer is consuming millet, but with the increase in income, he or she would like to purchase rice or wheat. People like to raise their standard with every increase in their income. Thus, inferior goods are less preferred by increasing income.
- Luxury goods
These are the commodities the demand for which is always increased with the increase in income. The goods that are luxurious always represent the standard of the consumer; thus, if people are earning more, they would like to raise their standard and then they would go for more luxurious goods. If we take the example of expensive cars, precious jewels, diamonds etc. comes in the category of luxurious goods.
- PREFERENCES AND TASTES OF THE CONSUMERS
The preferences of the people play an important role in changing the demand for the product. There is a lot of change in the tastes and preferences of the consumers, and that change is due to their living style, cultural values, the standard of living, gender or age etc. The change in all this leads to change the preferences of the consumers. As a result, the consumer decreases the purchase of these products and start buying the new one.
- PRICES OF COMPLEMENTARY AND SUBSTITUTE GOODS
These are the products, the prices of which are influenced by the prices of their complementary and substitute goods.
- Substitute Goods
These are the goods that are used to satisfy the same need of the consumers, but there is a price difference in these goods. For instance, tea and coffee are two substitute goods that can be used in place of each other, but both are sold at two different prices.
- Complementary Goods
These are the goods that cannot be used without each other. For example, if we have the car, then petrol or diesel will be the necessity. Therefore, these have a positive relationship such as, if the demand for one rises, the price of other will automatically increase.
- IMPACT OF ADVERTISEMENT
The advertisements also have an impact on the demand of the people. People are influenced if their favourite people are running advertisements. They tend to buy those products more, the ad of which will run on the television, newspaper or YouTube. People often take the advertisement part seriously, and they are emotionally attached to their ideal actor or actresses. Thus, this influences their buying habits or behaviour.
Therefore, the different determinants play a different role in changing the demand and supply of the consumer.