Explain in detail the determinants of demand.
In ordinary language, demand means a desire. Desire means an urge to have something. In Economics, demand means a desire which is backed by a willingness and ability to pay.
Definition of Demand:
According to Benham, “the demand for anything at a given price is the amount of it, which will be bought per unit of time at that price.”
The demand for goods is determined by the following factors:
- Price: Price determines the demand for a commodity to a large extent. Consumers prefer to purchase a product in large quantities when the price of a product is less and they purchase a product in small quantities when the price of a product is high.
- Income: Income of a consumer decides purchasing power which in turn influences the demand for the product. The rise in income will lead to a rise in demand for the commodity and a fall in income will lead to a fall in demand for the commodity.
- Prices of Substitute Goods: If a substitute good is available at a lower price then people will demand cheaper substitute goods than costly goods. For example, if the price of sugar rises then demand jaggery will rise.
- Price of Complementary Goods: Change in the price of one commodity would also affect the demand for other commodities. For example, cars and fuel. If the price of fuel rises, then demand for cars will fall.
- Nature of product: If a commodity is a necessity and its use is unavoidable, then its demand will continue to be the same irrespective of the corresponding price. For example, medicine to control blood pressure.
- Size of the population: Larger the size of the population, the greater will be the demand for a commodity and the smaller the size of population smaller will be the demand for a commodity.
- Expectations about future prices: If the consumer expects the price to fall in the future, he will buy less in the present at the prevailing price. Similarly, if he expects the price to rise in the future, he will buy more in the present at the prevailing price.
- Advertisement: Advertisement, sales promotion schemes, and effective sales-manship tend to change the preferences of the consumers and lead to demand for many products. For example, cosmetics, toothbrushes, etc.