Question

Explain briefly the factors which influence individual demand for a commodity. 

What factors influence the demand for a commodity? How does the law of demand take these factors into account?

Answer 1

1. Price of the Commodity: Of all the factors affecting demand, price is the most important factor. Other things being equal, demand for a commodity increases when its price falls and decreases when price rises. For example, a consumer's demand for mango is just 1 kg when it is priced at ₹ 80 per kg and rises to 2 kg when its price falls to ₹ 60 per kg. It is not only the existing price (i.e., price prevailing in the market) but expected changes in it also affect demand. For example, if people fear that there will be shortage of commodities and hence rise in their prices in future, they may now increase their demand for the commodities.
2. Price of Related Goods: The demand for a commodity depends not only on its own price, but also on the prices of related goods. If a change in the price of one good affects the demand for another good, it is called cross demand. We would say that these two goods are related. Related goods may be in the form of substitutes and complementary.
3. Income of the Consumer: Another important factor influencing demand is consumer's income. Other things being equal, generally, there is a direct relationship between the consumer's income and the demand for a commodity. However, the effect of change in income on consumer's demand depends upon the nature of the commodity. While discussing the relationship between the income of the consumer and demand for a commodity, we may distinguish between normal goods and inferior goods.
4. Tastes and Preferences: The amount demanded of a commodity also depends on consumers' tastes and preferences. When we begin to like certain commodities, their demand will increase. The reverse will happen if we start disliking them.
5. Consumer Credit Facility: If credit facilities are provided at low rates of interest by the banks or sellers of the commodity, households would be encouraged to buy more than what they would buy in their absence. For instance, demand for cars will increase if car loans from banks are easily and cheaply available. Similarly, demand for residential houses will rise if home loans are made cheaper.
6. If any of these factors change, the demand curve shifts:
   1. Rightward shift indicates an increase in demand (at every price).
   2. Leftward shift indicates a decrease in demand (at every price).