Determinants of Demand

Determinants of Demand

In economics, the determinants of demand refer to the factors that affect the quantities demanded of a commodity or service. These factors include:

1) Price of the Commodity:

The higher the price of the commodity, the lower the quantity demanded and vice-versa.

2) Prices of Related Goods:

Goods relate to each other in two ways. Goods are either complements or substitutes.

a) Complementary goods are goods with joint demand. They are needed jointly before a want could be satisfied e.g. camera and film, pen and ink, etc. With complementary goods, a rise in the price of one will lead not only to a fall in its demand but also a decrease in the demand for the other good. A fall in the price of one good would lead to an increase in the demand for the other.

b) Substitute goods are goods that satisfy the same need or want of the consumer e.g. Omo and Klin. For substitutes, a fall in the price of one leads to a decrease in the demand for the other while an increase in the price of one leads to an increase in the demand for the other, ceteris paribus.

3) Income of the Consumer:

A change in the consumer’s income may bring about a change in the demand for a good or service. However, the direction of change in demand will depend on the type of commodity in question.

a) For a normal good, demand might increase when the consumer’s income increases and demand might fall as the consumer’s income falls, ceteris paribus.

b) For an inferior good, demand might decrease when consumer income increases, ceteris paribus. Inferior goods are those goods that we consume more when we are worse off financially and less when we are better off e.g. second-hand goods.

c) For a necessity, a change in the consumer’s income may not affect demand.

4) Consumer Taste/Preference:

Any change in consumer taste or preference causes demand to change. Increased taste or preference for a particular good causes demand to increase whilst declining taste or preference causes demand to fall, ceteris paribus. Taste or preference for goods and services are influenced by advertisement, fashion, and sales promotions.

5) Population of Consumers:

Population and population changes may affect demand for a commodity. Areas of high population may demand more of certain commodities than areas of low population. Also, as the population of an area increases, the demand for goods and services will increase.

6) Consumer Expectations:

The decision to buy a commodity today is influenced by the expected future price of the commodity and expected change in the consumer’s income. If a consumer anticipates the price of a commodity to increase in future, today’s demand for the commodity will increase but if the consumer anticipates a fall in future price, then today’s demand for the commodity will fall. Similarly, an expected increase in the consumer’s income may cause current demand for a normal commodity to increase and vice-versa.

7) Marketing Strategies:

Marketing strategies such as advertising, publicity and sales promotions (e.g. raffles) are means used to get consumers to increase their purchases. They are intended to inform and persuade existing consumers as well as new ones to buy more of a commodity. Effective marketing strategies will lead to an increase in the demand for the commodity and vice-versa, ceteris paribus.

8) Natural Factors:

Seasonal variations may affect the demand for a commodity at certain times of the year. For example, during the rainy season, demand for jackets, raincoats, and umbrellas will increase while during the dry season; demand for commodities such as fans and air conditioners will rise.

9) Availability of Credit:

When consumers are given credit facilities in the form of credit purchases, hire purchases, and the use of credit cards and cheques, they are encouraged to buy more goods. Granting of credit facilities will increase demand for goods covered by these facilities, all things being equal.

10) Government Taxation Policy:

An increase in commodity tax would increase the price of a commodity, thereby, causing the demand for it to fall.