The factors or components that influence the decision of households to purchase a commodity are the determinants of demand. If we have to purchase any good then we might have influenced by several considerations like the amount that we want to spend for the good, our liking for the good, market trend, etc. This happens almost all the time with all of us.
Therefore the demand for any commodity is influenced by many factors such as the price of the product, price of the other commodity, the income of the consumer, taste of the consumers, advertisement, demonstration effect, expectations about future prices, size of the population, wealth, distribution of national income, governmental policy, etc. Here we discuss the major determinants of demand in brief.
Price of the Product
The price of the product is one of the most significant determinants of the demand for that particular commodity. In general demand for any product is inversely related to the price of that product. If the price goes up, demand diminishes, and vice versa. But in the case of Giffen goods (goods that are inferior and basic like low-quality rice and bread), the price of the Giffen good and its quantity demanded are positively related.
Thus we all have observed that we purchase more quantity as the price falls and less quantity as the price increases. This sort of demand is as Price Demand. So price demand deals with different quantities of a commodity that are purchased at different prices. This is more explained by the law of demand.
The Income of the Consumer
Another basic factor affecting demand is the income of the consumer as it determines the purchasing power of the consumers. Thus, people who have higher disposable income suppose to outflow a larger amount of income on consumer goods and services as compared to those who have comparatively lower disposable income. Though, this may not happen all the time.
If we discuss the relationship between the income of the consumer and the demand of consumers for different commodities we may split goods into different four heads namely inexpensive essential goods, inferior goods, normal goods, and prestige or luxurious goods.
This classification of the goods based on the relationship between the income of consumer and demand for goods is explained below:
Inexpensive Essential Consumer Goods
These are the inexpensive necessities of life and are consumed by all the persons of the society. Foodgrains, salt, cooking oil, matchbox, clothing, housing, etc., are those goods and the demand for such goods increases only up to a certain extent with an increase in income. There is always an upper limit to the consumption of such goods.
Those goods and services are called inferior whose demand is increased with a fall in income and decreased with a rise in income. It means any good to be considered an inferior one, its demand should decrease with the increases in the income beyond a certain level and vice-versa. There is not any specific example of inferior goods until we compare one good with another in the financial aspect. However, we take millet, bidi as inferior goods.
The goods whose demand moves parallel to the change in income are known as normal goods. It means demand for normal goods increases with an increase in income and falls with a fall in income. For example, clothing, furniture, automobiles, home appliances, etc. are normal goods in modern societies. All articles or goods related to comfort, luxuries, and prestige belong to the normal goods category. Moreover, the quantity demand for normal goods increases more rapidly with an increase in the income of the consumers.
Those goods are luxurious goods that add to the prestige and standard of living in human’s life. Expensive jewelry, stone, expensive wine, expensive watches, luxury cars, etc. are some of the examples of luxurious goods. The demand for such goods increases with the increase in the income of the consumers.
This type of functional relationship between the demand for a commodity and the level of income is income demand. Thus income demand shows how much quantity of a commodity a consumer will buy at different levels of his income.
Consumers’ Tastes and Preferences
The tastes and preferences of the consumers may also influence the demand for a commodity. Tastes and preferences over and over again depend on the social customs, lifestyle, culture, hobbies, age, and sex of the consumers and the religious sentiments attached to a commodity. The alterations in any of such elements result in the change in the tastes and preferences of the consumers and thereby increases or decrease the demand for the product. For example, the need for physical fitness leading to an increase in the demand for gym products is an example. Thus, the taste and preference of consumers are one of the highly influencing determinants of demand.
Price of the Related Goods
The demand for any good or the market demand for a product may also guide by the changes in the prices of the associated goods. The related goods may be classified into substitute or complementary goods.
Those goods are substitute goods that satisfy the same type of need and thus can be used in place of one another. Similarly, in the case of substitute goods, the changes in the price of one good/commodity will positively affect the quantity demand of another related good. For instance tea and coffee, Pepsi and Coca-Cola are close substitutes for each other. With the increase in the price of either commodity the demand for the other also increases or vice-versa.
Those goods are complementary to one another when they have to use jointly or together to satisfy demand. It means a commodity is a complement to another good if the use of two goods goes together to fulfill a particular need. For example, bread and butter, car and petrol, etc. are complementary goods. In the case of complementary goods, the change in the price of the major product will decrease the quantity demand of another related competent good.
The situation in which the demand for one particular product is governing by a change in the price of another product then is the cross demand or cross-price effect. Thus the cross demand shows the functional relationship between the price of a commodity and the demand for some other related commodity.
The expectations of consumers regarding things such as future price, income, availability of goods, economic and business environment, etc. also play an important role in determining the demand for commodities in the short run.
For instance, if the consumer expects a high rise in the price of the commodity, he or she would purchase it today at a high current price to avoid the squeeze of the high price in the future. On the other hand, if the prices are expected to fall soon the consumer will delay their purchase to gain benefits of lower prices in the future, particularly in the case of nonessential goods. Similarly, an anticipated boost in income increases the demand for a product and vice-versa. If the case is of the scarce goods, if its production is estimated to fall short in the future, the consumer will purchase it at current higher prices. In the same way, if the consumer expects unexpected changes in the economic environment shortly then also he would buy the goods and services at present even at higher prices.
Availability of Consumer’s Credit
If the buyers allow facilitating by credit facilities or they can borrow from the banks, they would increase the demand for such goods whose demand could not have fulfilled otherwise. For example, the demand for two-wheelers and four-wheelers will increase in Kathmandu if the government or BFIs provide easy access to credit facilities to the individuals.
The term demonstration effect refers to the tendency of an individual to copy or emulate the consumption pattern and style of other persons such as friends, relatives, neighbors, etc. This factor also affects the quantity demand for goods and services.
Distribution of Income
In the country, if the distribution of income is more equal then there is a lesser demand for luxury goods and more for normal goods. But if the distribution of national income is unequal then the demand for luxurious goods would increase and for normal goods would fall.
If the government imposes higher taxes in the form of VAT, excise duty, etc. the prices of the product will increase. Due to this demand for these commodities will fall. But if the government incurs more expenditure on the construction of infrastructure like roads, bridges, industries, etc. then the demand will be increased.
Size and Composition of the Population
The size and composition of the population also affect the demand for the commodity. The larger the size of the population higher will be the demand even at higher prices of the product. On the other hand composition of the population also affects the demand for goods and services in the market. Here the term composition of a population refers to the various facts of the population like the number of portions of children, adults, males, females, old ages, etc. If the number or proportion of the adult population is higher in the composition then demand will increase higher and if it covers largely by children and the old age population then demand would decrease. So the composition of the population is also among the major determinants of demand.
Thus as explained above the demand for a commodity depends on a large variety of factors. These factors collectively are determinants of demand or factors affecting demand or market demand.