Monday, May 19, 2014

Various Determinants of Demand

1. Price of a commodity: Price of the commodity is the most important factor that determine demand. An increase in price of a commodity leads to a reduction in demand and a decrease in price leads to an increase in demand.
2. Price of related goods:  Demand for a commodity depends on Price of related goods also. Related goods include both substitutes and complementary goods.
Substitutes are those goods which can be used one another or the goods with same use are substitutes. e.g.:- tea and coffee.When price of tea falls demand for coffee also falls. Because when price of tea falls people buy more tea and less coffee.
Complementary goods are those goods which can be used only jointly. e.g.: - car, petrol or pen, ink. When price of a commodity raises demand for its complementary goods falls. If x and y are complementary goods we cannot use x without y. When price of x raises demand for x falls and y cannot be used without x and demand for y also falls.
3. Income of the consumer: Income of the consumer and demand for a commodity are positively related. For normal goods when income increases demand also increases and vice versa. But for inferior goods there is a negative relationship between income and demand. So when income increases, demand decreases.

4. Taste and Preferences of consumers: Taste and Preferences of consumers also brings out changes in demand for a commodity. Tendency to imitate other fashions, advertisements etc affect demand for a commodity. It change from person to person, place to place and time to time.
5. Rate of Interest: Higher will be demanded at lower rates of interest and lower will be demanded at higher rate of interest.
6. Money supply: Demand is positively related to money supply. If the supply of money increases people will have more purchasing power and hence the demand will increase and vice versa.
7. Business condition: Demand will be high during boom period and low during depression.
8. Distribution of income: Distribution income in the society also affects the demand of commodity. If there is equal distribution of income demand for necessary goods and comforts will be greater.
9. Government policy: Government policy also affects the demand of commodities.

10. Consumers’ expectations: Consumers’ expectation about a further rise or fall in future price will affect the demand of a commodity. If consumers expect a rise in the price of a commodity in the near future, they may purchase large quantity even though there is some rise in the price. When the price of a commodity decreases, people expect a further fall in price and postpone their purchase. 

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