5 Factors That Affect Demand

Updated: 2 days ago

In economics, demand is a fundamental concept that refers to a consumer's desire to purchase goods and services and willingness to pay a price for them. Demand, along with supply, determines the actual prices of goods and the volume of goods that changes hands in a market.


1. Demand curve


The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity demanded for a given period of time. The demand curve will move downward from the left to the right, which expresses the law of demand: As the price of a given commodity increases, the quantity demanded decreases (all else being equal). When the price of commodities decreases, the quantity demanded will then increase.


The demand curve

(Source)


2. Factors affecting demand


Some major factors affect demand in microeconomics. Besides price, demand for a commodity increases or decreases due to the factors below.


a. Income


The demand for goods and services also depends on the incomes of the people. The greater the incomes, the greater their demand will be. However, the effect of change in income on demand depends on the nature of the commodity under consideration. If a specific good is a normal good, then an increase in income leads to rise in its demand, while a decrease in income reduces the demand. But if the given commodity is an inferior good, an increase in income will then reduce the demand, and a decrease in income leads to rise in demand.


For example, between “toned milk” - an inferior good and “full cream milk” - a normal good, if the price goes up, the demand for “toned milk” will drop while that of “full cream milk” will increase. This happens because the consumers now have higher income and have a tendency to choose a better product or service to use.


Income is a factor affecting demand

b. Prices of substitutes and complementary goods


A substitute, or substitute good in economics is a product or service a consumer sees as the same or similar to another product. An increase in the price of substitute will lead to an increase in the demand for given commodity and vice-versa. For example, if the price of a substitute good like tea increases, the demand for a commodity such as coffee will rise as coffee will become relatively cheaper than tea. So, demand for a given commodity is directly affected by change in price of substitute goods.


A complement refers to a complementary good or service used in conjunction with another good or service. Usually, the complementary good has little to no value when consumed alone, but when combined with another good or service, it adds to the overall value of the offering. An increase in the price of complementary goods leads to a decrease in the demand for given commodity and vice-versa. For example, if the price of a complementary good like condensed milk increases, then demand for given commodities as coffee will slightly 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.


Price of substitue is a factor affecting demand

c. Number of consumers


The market’s demand for a good is influenced by adding up the individual demands of the present as well as prospective consumers of a good at various possible prices. The greater the number of consumers of a good, the greater the market demand for it. The increase in consumers can happen when more and more favored substitute goods than a specific commodity. Then the number of substitute’s buyers will rise. When the seller expands to a new market to distribute goods, or when there is a growth in the population, the demand for a specific good can also escalate.


d. Consumers’s taste and preferences


Tastes and preferences of the consumer have a direct influence on the demand for a commodity. This can be applied for products in fashion, customs, habits, etc. For example, if a commodity in fashion is on trend and is preferred by the consumers, the demand for such a commodity will definitely rise. On the other hand, demand for it will fall, if the consumers have no taste or preference for that commodity.


Consumers’s taste and preferences is a factor affecting demand

e. Consumer’s expectation


Another factor which influences the demand for goods is consumers’ expectations with regard to future prices of the goods.If the price of a certain commodity is expected to increase in near future, the consumer will buy more of that commodity than what they normally buy. In that situation, they won't have to pay a higher price in the future. If the price of petrol is expected to rise in the next few days, people will rush for fuel. Similarly, when the consumers expect that in the future the prices of goods will fall, then in the present they will postpone a part of the consumption of goods with the result that their present demand for goods will decrease.


References:

1.http://www.economicsdiscussion.net/essays/economics/6-important-factors-that-influence-the-demand-of-goods/926

2.http://stud.sisekaitse.ee/saar/Demand&supply/factors_affecting_demand.html

3.http://www.yourarticlelibrary.com/economics/5-major-factors-affecting-the-demand-of-a-product-micro-economics/8882


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