Management Notes

Reference Notes for Management

Determinants of Market Demand – 9 Major Determinants | Economics

Determinants of Market Demand

All of the individual consumer demands for the commodity over a period of time, at each possible price, are considered the market demand. According to market demand, all consumers will purchase a good or service at a given price if certain other factors such as income, tastes, and preferences remain the same.

The growth of the economy is driven by demand. Profits can be improved by increasing demand for businesses. A government or central bank boosts demand to end a recession. During expansion phases of business cycles, they slow it to reduce inflation. Any paid service you provide is an attempt to increase demand. Consumers’ decisions to buy things are influenced by an infinite number of factors in the real world. The following are some of the major determinants of market demand:

  1. Price of the Product
  2. Price of the Related Goods
  3. Consumer’s Income
  4. Consumer’s taste and preference
  5. Advertisement Expenditure
  6. Consumers’ Expectations
  7. Consumer-Credit Facility
  8. Population of the Country
  9. Distribution of National Income

1) Price of the Product

In the long run, the price of the product is one of the most important determinants of demand, and in the short run, it is the only determinant. There is an inverse relationship between price and quantity demand. Despite other factors remaining constant, the quantity demanded per unit of time of a product by its consumers/users increases when its price falls, and decreases when its price increases.

If other factors remain constant, we have the same income of the consumers, the same prices of substitutes and complementary goods, the same taste and preferences of consumers, and the same number of consumers.

2) Price of the Related Goods

Prices of related goods also affect the demand for a commodity. Related goods may be substitutes or complementary goods.

a) Substitute Goods:

When one commodity’s price changes in the same direction as the demand for another, they are considered substitutes. As an example, commodities X and Y may be substitutes for each other if a price rise for X increases the demand for Y and Vice Versa.

For Example,

  • Tea and coffee,
  • Hamburgers and Hot-dog,etc

b) Complementary Goods:

The use of two commodities that change simultaneously (increases or decreases) is considered a complement of the other when it complements the use of the other.

For example,

  • Petrol is a complement to car and scooters,
  • Butter and Jam to bread,
  • Milk and Sugar to Tea and Coffee, etc

When the price of one good decreases, demand for the other increases, two goods are considered complementary. In general, the price of a good’s complement is inversely related to its demand. An increase (or decrease) in petrol prices, for example, decreases (or increases) demand for cars and other petrol-powered vehicles.

3) Consumer’s Income

Income determines the purchaser’s purchasing power, which determines the quantity demanded of a product. People with higher current disposable income are more likely to spend more on goods and services than those who have lower incomes. The relationship between income and demand differs from that between demand and its other determinants. Income is equally important in both the short-run and the long-run as a determinant of demand, while other determinants, e.g., the product’s own price and the price of substitutes, are more important in the short-run.

a) Essential consumer goods (ECG):

All members of a society consume this category of goods and services, such as food grains, salt, vegetable oils, matches, cooking fuel, clothing, and housing. Although the total expenditure may rise according to the quality of goods consumed, other factors remain the same, the quantity demanded of this category of goods increases with increase in consumer income.

b) Inferior goods: 

It is widely known that inferior and superior goods exist, both to the consumer and to the seller. There are many products that consumers know to be inferior to wheat and rice, for instance millet (indigenous cigarette) is inferior to cigarette, coarse textiles are inferior to refined textiles, kerosene is inferior to cooking gas, and so on. Commodities are considered inferior economically, however, if their demand decreases with increasing incomes.

c) Normal goods:

When consumer incomes rise, more and more normal goods are demanded. A few examples of this category of goods are clothing, furniture, and automobiles. A consumer’s income increases rapidly, but the demand for normal goods slows down as income increases further.

d) Prestige and luxury goods:

In society, prestige goods are items that are mainly consumed by the wealthy, such as precious stones, antiques, rare paintings, luxury cars, and other items of self-promotion. Luxury items include jewellery, expensive cosmetic brands, TV sets, refrigerators, electrical gadgets, and CDs, even though they may seem controversial. Generally, such goods become desirable once consumer income exceeds a certain level, i.e. luxury goods are consumed. In assessing the demand for such items, producers should not only look at per capita income, but also the income changes in the richer sections of society.

4) Consumer’s taste and preferences: 

Demand for a product is greatly influenced by consumer taste and preference. Taste and preference are determined by a variety of factors including changing lifestyles, social customs, religious values related to a commodity, habits of the people, and the general level of living in the society. Consumer tastes and preferences change as a result of changes in these factors. As a result, consumers reduce or give up consumption of some goods and add new ones.

When fashion changes, people tend to switch from old-fashioned, cheaper goods to newer, more expensive goods as long as their preferences correspond to the price differential.

5) Advertisement Expenditure:

The purpose of advertising is to promote product sales. Advertising increases consumer demand in at least four ways: (a) by letting them know that the product is available; (b) by showing its superiority over its rivals; (c) by influencing their choice; and (d) by setting fashions and changing tastes. As a result, the demand shifts upwards to the right. As advertising expenditures increase, volume of sales increases, assuming other factors remain the same.

6) Consumers’ Expectations:

Demand for goods and services is determined in the short run by consumers’ expectations about future prices, incomes, and supply positions. A consumer who expects a rise in price of a storable commodity will purchase more of it now in order to avoid the pinch of price rises in the future.

Conversely, consumers postpone their purchases of certain goods if they anticipate a fall in price in the future, particularly for non-essential goods, with the aim of taking advantage of lower prices in the future. Due to this behavior, the current demand for goods whose prices are expected to decrease in the future is reduced.

7) Consumer-Credit Facility:

Consumers buying more than they would have if there was no availability of credit from sellers, banks, relatives, or friends encourages them to spend more than they would without it. Due to this, consumers who are able to borrow more are able to consume more than those who cannot.

Credit facility is primarily believed to influence the demand for durable goods, particularly those requiring bulk payments when they are purchased. Compared with Calcutta, Chennai, and Mumbai, Delhi has more cars because of the car-loan facility.

8) Population of the Country:

Population size also influences the total domestic demand for mass consumption products. If the population increases or decreases, and employment percentage stays the same, demand for a product will increase or decrease based on the price, per capita income, taste, and preference, etc.

9) Distribution of National Income

It is also important to consider the distribution pattern of national income when determining the quality of a product. The largest market demand for normal goods will occur if national income is evenly distributed. There will be the highest market demand for normal goods if national income is evenly distributed.

There will be a greater demand for essential goods, including inferior ones, if national income is unevenly distributed, i.e. the majority of the population belongs to the lower income groups. Conversely, the demand for other kinds of goods will be relatively low.

Similarly, You May Also Like:

Leave a Comment