Determinants of demand : – (Individual demand):-
Demand for a commodity increases or decreases due to a number of factors. The various factors affecting demand are :-
1. Price of the Given commodity :
It is the most important factor affecting demand for the given commodity. Generally there exists an inverse relationship between price and quantity demanded. It means as price increases, quantity demanded falls due to decrease in the satisfaction level of consumers.
For example :- If the price of the given commodity (say tea) increases its quantity falls as satisfaction derived from tea will fall due to rise in its price.
The following determinants are termed as ‘other factors’ or factors ‘other than price’
2. Price of related goods:-
Demand for the given commodity is also affected by the change in prices of the related goods. Related goods are of two types :-
(i) Substitute goods:- Substitute goods are those goods which can be used in place of one another for satisfaction of a particular want, like tea and coffee. An increase in the price of substitute leads to an increase in the demand for given commodity and vice – versa. For example : – If price of a substitute good (say, coffee) increases then demand for given commodity (say, tea) will rise as tea will become relatively cheaper in comparison to coffee. So, demand for a given commodity is directly affected by change in price of substitute goods.
(ii) Complementary goods:- Complementary goods are those goods which are used together to satisfy a particular want, like tea and sugar, An increase in the price of complementary good leads to a decrease in the demand for given commodity and vice – versa. For example : – if the price of a complementary good (say, sugar) increases, then demand for given commodity (say, tea) will fall as it will be relatively costlier to use both the goods together. So, demand for a given commodity is inversely affected by change in price of complementary goods.
Example of substitute goods:-
Tea and coffee
Coke and Pepsi
Pen and Pencil
CD and DVD
Ink pen and ball pen
Rice and wheat
Example of complementary goods:-
Tea and Sugar
Pen and ink
Car and Petrol
Bread and Butter
Pen and Refill
Brick and cement
3. Income of the consumer:-
Demand for a commodity is also affected by income of the consumer. However, the effect of change in income on demand depends on the nature of commodity under consideration.
- If the given commodity is a normal good, then an increase in income lads to rise in its demand, while a decrease in income reduces the demand.
- If the given commodity is an inferior good, then an increase in income reduces the demand while a decrease in income leads to rise in demand.
Example :- Suppose income of a consumer increases. As a result, the consumer reduces consumption of toned milk and increases consumption of full cream milk. In this case ‘Toned milk’ is an inferior good for the consumer and ‘Full cream milk’ is a normal good.
4. Tastes and Preferences : –
Tastes and preferences of the consumer directly influence the demand for a commodity. They include changes in fashion, customs, habits etc. If a commodity is in fashion or is preferred by the consumers, then demand for such a commodity rises. On the other hand, demand for a commodity falls, if the consumers have no taste for that commodity.
5. Expectation of change in the price in future : –
If the price of a certain commodity is respected to increase in near future, then people will buy more of that commodity than what they normally buy. There exists a direct relationship between expectation of change in the prices in future and change in demand in the current period
For example : – If the price of petrol is expected to rise in future, its present demand will increase. Change in quantity demanded us change in demand:-
- Change in quantity demanded : – Whenever demand for the given commodity changes due to change in its own price, then such change in demand is known as “ Change in Quantity Demand”. For example, if demand for Pepsi changes due to. Change in its own price, then such change in demand is known as “Change in Quantity Demanded”. For example, if demand for Pepsi changes due to change in its own price, then such change in demand for Pepsi is known as change in quantity demanded.
- Change in Demand : – Whenever demand for the given commodity changes due to factors other than price, then such change in demand is known as “Change in demand”. For example : – If demand for Pepsi changes due to change in price of Coke or due to change in income or due to a change in taste, then such change in demand for Pepsi is known as change in demand.