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Determinants of demand
Definition
Determinants of individual demand
The determinants of individual demand of a particular good, service or commodity refer to all the factors that determine
the quantity demanded of an individual or household for the particular commodity. The main determinants of demand are:
1.
The (unit) price of the commodity. When in the price of the commodity itseld increases demand for that commodity goes
down and vice versa.
2.
The tastes and preferences of the individual or household.favourable change in taste and preference increases demand and
vice versa.
3.
The prices and nature of substitute goods, i.e., goods whose consumption can replace the consumption of the given good.
The cheaper and better the substitute goods, the less the demand, other things being equal,. This is termed the substitution
effect.
4.
The prices and nature of complementary goods, i.e., goods for which increased consumption makes the consumption of the
given good more worthwhile. A drop in the price of complementary goods leads to an increase in demand, other things being
equal.
5.
The income that the household has. An increase in income leads to an increase in demand for most goods. This is termed
the income effect. Goods for which the income effect is reversed are typically inferior goods. For these good, demand may
drop with a rise in income. Demand for inferior goods decreases when income increases and vice versa. Demand for normal
goods increases when income increases and vice versa.
6.
Expectations of future prices. This is particularly important for durable goods for which there is no urgency to purchase. In
general, if future prices are expected to be lower, demand is less for a given price, because a person decides to delay the
purchase. If future prices are expected to be higher, demand may be higher for a given price, because a person prefers to
buy now before the good becomes too expensive.
Determinants of market demand
Apart from all the determinants of individual demand following are
demand
1.
major factors affecting
The size of the market.a larger market means more demand, and a more outward market demand curve. No. of people
living in a part5icular area also determine demand, more the no. of people more will be demand of a commodity in that
area.
2.
The surrounding circumstances, such as climate, weather, that have an effect on the desirability of possessing the good.
For eg. In hilly areas demand for woollens is more and in deserts demand for coolers is more.
3.
Distribution of income also determines market demand. In area where rich people live demand for luxuries is more and in
areas where poor people live demadn for necessities will be more.
Determinants of change in demand
Effect of unit price
Unit price has a direct effect on the quantity demanded but not on the demand curve (which is a plot of quantity demanded
against individual price). The relationship is studied by studying the demand curve. The most important feature of this
relationship is the law of demand, which asserts that an increase in unit price leads to a decrease in quantity demanded.
Other determinants
The cause of a change in quantity demanded, either at the individual or market level, is usually a change in one of the
determinants of demand. Given below is a comprehensive table of examples:
Determinant of
demand
Individual or
market?
Nature of change
Effect on quantity demanded ceteris paribus and
hence on demand curve
Tastes and preferences
Individual
increase in preference
positive, hence expansion of demand curve
Tastes and preferences
Individual
decrease in preference
negative, hence contraction of demand curve
Price of substitute good
Individual
increase in price
positive, hence expansion of demand curve
Price of substitute good
Individual
decrease in price
negative, hence contraction of demand curve
Nature of substitute
good
Individual
better substitution
Demand could shift between the two substitutes
depending on the relative prices.
Nature of substitute
good
individual
worse substitution
Demand could shift between the two substitutes
depending on the relative prices.
Price of complementary
individual
good
increase in price
negative, hence contraction of demand curve
Price of complementary
individual
good
decrease in price
positive, hence expansion of demand curve
Nature of
complementary good
individual
increase in
complementarity
positive (generally), hence expansion of demand curve
Disposable income
individual
increase in income
positive (usually), hence expansion of demand curve (
in case of normal good)
Disposable income
individual
decrease in income
negative (usually), hence contraction of demand curve
( in case of normal good)
Expectations of future
prices
individual
increase in future price
expectation
positive, hence expansion of demand curve
Expectation of future
prices
individual
decrease in future price
expectation
negative, hence contraction of demand curve
Environmental need for
good
individual
increase in environmental
need
positive, hence expansion of demand curve
Environmental need for
good
individual
decrease in environmental
negative, hence contraction of demand curve
need
Market size
market
increase in market size
positive, hence expansion of demand curve