Determinants & Distinctions of Demand - Market Demand Analysis, Business Economics & Finance | Business Economics & Finance - B Com PDF Download

The demand of a product is influenced by a number of factors.

An organization should properly understand the relationship between the demand and its each determinant to analyze and estimate the individual and market demand of a product.

The demand for a product is influenced by various factors, such as price, consumer’s income, and growth of population.

For example, the demand for apparel changes with change in fashion and tastes and preferences of consumers. The extent to which these factors influence demand depends on the nature of a product.

An organization, while analyzing the effect of one particular determinant on demand, needs to assume other determinants to be constant. This is due to the fact that if all the determinants are allowed to differ simultaneously, then it would be difficult to estimate the extent of change in demand.

Following are the determinants of demand for a product:

i. Price of a Product or Service:

Affects the demand of a product to a large extent. There is an inverse relationship between the price of a product and quantity demanded. The demand for a product decreases with increase in its price, while other factors are constant, and vice versa.

For example, consumers prefer to purchase a product in a large quantity when the price of the product is less. The price-demand relationship marks a significant contribution in oligopolistic market where the success of an organization depends on the result of price war between the organization and its competitors.

ii. Income:

Constitutes one of the important determinants of demand. The income of a consumer affects his/her purchasing power, which, in turn, influences the demand for a product. Increase in the income of a consumer would automatically increase the demand for products by him/her, while other factors are at constant, and vice versa.

For example, if the salary of Mr. X increases, then he may increase the pocket money of his children and buy luxury items for his family. This would increase the demand of different products from a single family. The income-demand relationship can be analyzed by grouping goods into four categories, namely, essential consumer goods, inferior goods, normal goods, and luxury goods.

The relationship between the income of a consumer and each of these goods is explained as follows:

a. Essential or Basic Consumer Goods:

Refer to goods that are consumed by all the people in the society. For example, food grains, soaps, oil, cooking fuel, and clothes. The quantity demanded for basic consumer goods increases with increase in the income of a consumer, but up to a fixed limit, while other factors are constant.

b. Normal Goods:

Refer to goods whose demand increases with increase in the consumer’s income. For example, goods, such as clothing, vehicles, and food items, are demanded in relatively increasing quantity with increase in consumer’s income. The demand for normal goods varies due to .different rate of increase in consumers’ income.

c. Inferior Goods:

Refer to goods whose demand decreases with increase in the income of consumers. For example, a consumer would prefer to purchase wheat and rice instead of millet and cooking gas instead of kerosene, with increase in his/her income. In such a case, millet and kerosene are inferior goods for the consumer.

However, these two goods can be normal goods for people having lower level of income. Therefore, we can say that goods are not always inferior or normal; it is the level of income of consumers and their perception about the need of goods.

d. Luxury Goods:

Refer to goods whose demand increases with increase in consumer’s income. Luxury goods are used for the pleasure and esteem of consumers. For example, expensive jewellery items, luxury cars, antique paintings and wines, and air travelling.

iii. Tastes and Preferences of Consumers:

Play a major role in influencing the individual and market demand of a product. The tastes and preferences of consumers are affected due to various factors, such as life styles, customs, common habits, and change in fashion, standard of living, religious values, age, and sex.

A change in any of these factors leads to change in the tastes and preferences of consumers. Consequently, consumers reduce the consumption of old products and add new products for their consumption. For example, if there is change in fashion, consumers would prefer new and advanced products over old- fashioned products, provided differences in prices are proportionate to their income.

Apart from this, demand is also influenced by the habits of consumers. For instance, most of the South Indians are non-vegetarian; therefore, the demand for non- vegetarian products is higher in Southern India. In addition, sex ratio has a relative impact on the demand for many products.

For instance, if females are large in number as compared to males in a particular area, then the demand for feminine products, such as make-up kits and cosmetics, would be high in that area.

iv. Price of Related Goods:

Refer to the fact that the demand for a specific product is influenced by the price of related goods to a greater extent.

Related goods can be of two types, namely, substitutes and complementary goods, which are explained as follows:

a. Substitutes:

Refer to goods that satisfy the same need of consumers but at a different price. For example, tea and coffee, jowar and bajra, and groundnut oil and sunflower oil are substitute to each other. The increase in the price of a good results in increase in the demand of its substitute with low price. Therefore, consumers usually prefer to purchase a substitute, if the price of a particular good gets increased.

b. Complementary Goods:

Refer to goods that are consumed simultaneously or in combination. In other words, complementary goods are consumed together. For example, pen and ink, car and petrol, and tea and sugar are used together. Therefore, the demand for complementary goods changes simultaneously. The complementary goods are inversely related to each other. For example, increase in the prices of petrol would decrease the demand of cars.

v. Expectations of Consumers:

Imply that expectations of consumers about future changes in the price of a product affect the demand for that product in the short run. For example, if consumers expect that the prices of petrol would rise in the next week, then the demand of petrol would increase in the present.

On the other hand, consumers would delay the purchase of products whose prices are expected to be decreased in future, especially in case of non-essential products. Apart from this, if consumers anticipate an increase in their income, this would result in increase in demand for certain products. Moreover, the scarcity of specific products in future would also lead to increase in their demand in present.

vi. Effect of Advertisements:

Refers to one of the important factors of determining the demand for a product. Effective advertisements are helpful in many ways, such as catching the attention of consumers, informing them about the availability of a product, demonstrating the features of the product to potential consumers, and persuading them to purchase the product. Consumers are highly sensitive about advertisements as sometimes they get attached to advertisements endorsed by their favorite celebrities. This results in the increase demand for a product.

vii. Distribution of Income in the Society:

Influences the demand for a product in the market to a large extent. If income is equally distributed among people in the society, the demand for products would be higher than in case of unequal distribution of income. However, the distribution of income in the society varies widely.

This leads to the high or low consumption of a product by different segments of the society. For example, the high income segment of the society would prefer luxury goods, while the low income segment would prefer necessary goods. In such a scenario, demand for luxury goods would increase in the high income segment, whereas demand for necessity goods would increase in the low income segment.

viii. Growth of Population:

Acts as a crucial factor that affect the market demand of a product. If the number of consumers increases in the market, the consumption capacity of consumers would also increase. Therefore, high growth of population would result in the increase in the demand for different products.

ix. Government Policy:

Refers to one of the major factors that affect the demand for a product. For example, if a product has high tax rate, this would increase the price of the product. This would result in the decrease in demand for a product. Similarly, the credit policies of a country also induce the demand for a product. For example, if sufficient amount of credit is available to consumers, this would increase the demand for products.

x. Climatic Conditions:

Affect the demand of a product to a greater extent. For example, the demand of ice-creams and cold drinks increases in summer, while tea and coffee are preferred in winter. Some products have a stronger demand in hilly areas than in plains. Therefore, individuals demand different products in different climatic conditions.