Demand is an economic principle which indicates the consumer’s desire or willingness to pay a certain price for a particular good or service. Demand is not limited to the consumer’s desire for a certain product and can be used to address the demand in a market. Market demand tells what everybody in the market desires for. It is the demand that influences the economy, without it no business would bother producing anything. That’s why many businesses pay a lot of money to determine the amount of amount of demand the consumers have for their products or services. Any miscalculation could lead to a huge loss.
In economics, demand is closely related to supply, usually known by “Supply & Demand”. On one side, the consumers (buyers) looking to buy goods and services at as lowest price as possible, on another side, the suppliers (sellers) try to maximize their profits. If the suppliers charge too much then the demand of a product would drop, which will reduce the profits of suppliers but if the suppliers charge too low then the demand of the product will increase since the consumers will be getting the product at low prices. Also, the suppliers may not make enough to cover the product’s cost or make profits. In short, the price of a good or service can increase or decrease the demand for a product. That’s why every organization must understand the relationship between the demand and each determinant to properly analyze and estimate the demand of a product in the respective market. The determinants or factors affecting the demand are – price, consumer’s income, population and much more.
Although there are other factors that affect the demand of a product if keep those constant then the price of a good or service is the major factor affecting the demand. There are other determinants of demand which we are going to discuss here today. These determinants are the key factors behind the fluctuations in the economic demand of a product or a service.
5 Key Determinants of Demand
For individual goods or service there are 5 determinants of demand which are as follows:
- Price of Goods or Services
- Consumers Income
- Price of Related Goods or Services
- Consumers Expectations
- Consumers Tastes
These above are the five major factors affecting the demand for individual good or service. And the equation that expresses the relationship between demand and its 5 determinants is:
qD = f (price, income, the price of related goods, expectations, tastes)
The above equation tells that the quantity demanded of a product is a function of five determinants or factors.
Factors Affecting Demand of a Product
To understand the working of each factor or determinant affecting demand you need to assume all determinants are constant and won’t interfere in the working of another determinant. In economics, this principle of keeping other determinants constant is called ceteris paribus. In English, it translates “other things being equal”.
Price of Good or Service
Like we mentioned above, the price of goods and services is one of the key economic factors affecting the demand for a product. In fact, the prices affect the quantity demanded to a large extent. According to the law of demand, the quantity demanded and price of a product has an inverse relationship. If the price of a product falls, the quantity demanded will rise, while other factors are constant, and vice-versa.
Price (P) ⬆ ➡ Quantity Demanded (qD) ⬇
Generally, the consumers consider “Price” as a parameter and take their purchasing decisions based on the price of the item they want to buy. So, any consumer will only buy in bulk when the price of the product is less.
Consumers’ income is another important determinant of the demand for a product. Stating the obvious but a consumer in a good financial condition will spend more on goods and services. This indicates that the consumers’ income and demanded quantity has a direct relationship – If consumers income rise, so will demand and if consumers’ income fall, so will demand quantity.
But, it is not entirely true. There are certain goods and services that a consumer will only have in a limited amount. Whether the salary of a person doubles, there are certain things you will buy in the same amount. So, the relationship between demand quantity and consumers’ income is not entirely linear in nature. This is where the marginal utility comes in the picture.
There is no guarantee that a person would buy more when his/her salary increases. Also, there are different types of goods that decrease in demand with increased income, and vice-versa. To best understand this, let’s assume an average person become a millionaire after winning the big lottery. It is clear he would likely to take more rides on private jets and take fewer rides on the subway than before.
In economics, the items are categorized as normal goods and inferior goods. In the above example, the jet rides are normal goods and subway rides are inferior goods.
On the basis of this, we can say that the demanded quality will rise with the income if the goods are normal goods but fall with the rise in income if the goods are inferior goods.
Also, a normal good for a person could be inferior to another and the inferior good to one could be normal for another.
On the basis of above discussion we can put it in an expression:
For Normal Goods:
Income (I) ⬆ ➡ quantity demanded (qD) ⬇
For Inferior Goods:
Income (I) ⬇ ➡ quantity demanded (qD) ⬆
Price of Related Goods or Services:
Sometimes the price of a good or service depends upon the substitute and complementary good rather than its own. But, to understand this, first, you will need to understand what are the complementary goods and substitutes.
Substitute goods or services are those that can be used as a replacement. These goods allow consumers to purchase the product with the same needs but at a different price. The tea and coffee, mustard oil and sunflower oil, Pepsi and coca-cola are substitute goods. The rise in the price of a good or product will increase in demand of its substitute product or good and fall in the price of a good or product will decrease in demand of its substitute product or good. That’s why people prefer to purchase a substitute product when the price of a particular product gets increased.
However, the complementary goods are goods that are used simultaneously or in combination. For example, car and petrol, pen and ink, and tea and sugar are complementary goods. In short, these goods consumed simultaneously.
For example, car and petrol are complementary goods. If there is a rise in the price of petrol then the demand quantity will decrease which will lead to reductions in the demand for cars. Thus, the complementary goods are inversely proportional to each other.
Consumers’ expectation is also a very important factor affecting the demand for a specific product or service. When people believe that the prices of a certain good or service will increase in future then the demand of that specific good or service will increase, and vice-versa. Similarly, if the people expect to increase future income the demand for a specific good or service will increase but if they expect the lower future income the demand will decrease.
In economics, there is another term according to the law of demand i.e. consumers taste. If people have a high taste for a good or service then the quantity demand for that product or service will increase, and vice-versa.
Hope, this article on the ‘Factors affecting the demand of a product’ helped you understand the key determinants of demand. Nevertheless, if you have any query or would like to add something then doesn’t forget to mention in the comment section below.