Determinants of market demand

demands determinants

1. Determinants of Market Demand
Definition: The Market Demand is defined as the sum of individual demands for
a product per unit of time, at a given price. Simply, the total quantity of a
commodity demanded by all the buyers/individuals at a given price, other things
remaining same is called the market demand.
There are several factors that determine the demand for a product.
These are:

1. Price of the Product: The price of a product is the most important determinant
of market demand in the long-run and the only determinant in the short-run. As
per the law of demand, the price of a product and its quantity demanded are
inversely related, i.e. the quantity demanded increases when the price falls and
decreases when the price rises, other things remaining the same.
Here, other things imply that the income of the consumer, the price of the
substitute and complementary goods, tastes and preferences and the number of
consumers, all remains constant. The price-demand relationship has more
significance in the oligopolistic market structure in which the result of a price war
among the firm and its rival decides the level of success of the firm.

2. 2. Price of the Related Goods: The market demand for a commodity is also
affected by the changes in the price of the related goods. The related goods may
be the substitute or complementary goods. Two commodities are said to be a
substitute for one another if they satisfy the same want of an individual and the
change in the price of one commodity affects the demand for another in the
same direction. Such as, tea and coffee, Maggi and Yippie, Pepsi and Coca-
Cola are close substitutes for each other. The increase in the price of either
commodity the demand for the other also increases and vice-versa.
A commodity is said to be a complement for another if the use of two goods goes
together such that their demand changes (increases or decreases)
simultaneously. For example, bread and butter, car and petrol, mattress and
cot, etc. are complementary goods. The increase in the price of either commodity
the demand for another decreases and vice-versa.
3. Consumer’s Income: The income is the basic determinant of the quantity
demanded of a product as it decides the purchasing power of the consumers.
Thus, people with higher disposable income spend a larger amount of
income on consumer goods and services as compared to those with lower
disposable income. Consumer goods and services can be grouped under four
categories: essential goods, inferior goods, normal goods, and prestige or luxury
goods. The relationship between the consumer’s income and these goods is
explained below:
 Essential Consumer Goods: The essential goods are the basic necessities
of the life and are consumed by all the persons of the society. Such as food
grains, salt, cooking oil, clothing, housing, etc., the demand for such
commodities increases with the increase in consumer’s income but only up to
a certain limit, although the total expenditure may increase with respect to the
quality of goods consumed, other things remaining the same.
 Inferior Goods: A commodity is deemed to be inferior if its demand
decreases with the increases in the consumer’s income beyond a certain
level of income and vice-versa. For example, Bajra, millet, bidi are the inferior
goods.
 Normal Goods: The normal goods are those goods whose demand
increases with the increase in the consumer’s income, such as clothing,
household furniture, automobiles, etc. It is to be noted that, demand for the
normal goods increases rapidly with the increase in the consumer’s income
but slows down with a further increase in the income.
 Luxury Goods: The luxury goods are those goods which add to the prestige
and pleasure of the consumer without enhancing the earnings. For example,

3. jewelry, stone, gem, luxury cars, etc. The demand for such goods increases
with the increase in the consumer’s income.
4. Consumers’ tastes and preferences: Consumer’s Tastes and preferences play
a vital role in determining a demand for a product. Tastes and preferences often
depend on the lifestyle, culture, social customs, hobbies, age and sex of the
consumers and the religious sentiments attached to a commodity. The change in
any of these factors results in the change in the consumer’s tastes and
preferences, thereby resulting in either increase or decrease in the demand for a
product.
5. Advertisement Expenditure: Advertisement is done to promote sales of a
product. It helps in stimulating demand for a product in four ways; by
informing the prospective consumers about the availability of a product, by
showing its superiority over the competitor’s brand, by influencing the consumer’s
choice against the rival product and by setting new fashion and changing tastes
of the consumers. The effect of advertisement is said to be fruitful if it leads to the
upward shift in the demand curve, i.e. the demand increases with the increase in
the advertisement expenditure, other things remaining constant.
6. Consumers’ Expectations: In the short run, the consumer’s expectation with
respect to the income, future prices of the product and its supply
position plays a vital role in determining the demand for a commodity. If the
consumer expects a high rise in the price of the commodity, shall purchase it
today at a high current price so as to avoid the pinch of the high price in the
future. On the contrary, if the prices are expected to fall in the future the
consumer will postpone their purchase with a view to avail benefits of lower
prices in the future, especially in case of nonessential goods.
Likewise, an expected increase in the income increases the demand for a
product and vice-versa. Also, in the case of scarce goods, if its production is
expected to fall short in the future, the consumer will buy it at current higher
prices.
7. Demonstration Effect: Often, the new commodities or new models of an
existing product are bought by the rich people. Some people buy goods due to
their genuine need for them or have excess purchasing power. While some
others do so because they want to exhibit their affluence. Once the commodity is
in very much fashion, many households buy them not because they have a
genuine need for them but their neighbors have purchased it. Thus, the purchase
made by such people arises out of feelings as jealousy, equality in society,
competition, social inferiority, status consciousness. The purchases made
on the account of these factors results in the demonstration effect, also called
as Bandwagon Effect.

4. 8. Consumer-Credit Facility: The availability of credit to the consumer also
determines the demand for a product. The credit extended by sellers, banks,
friends, relatives or from other sources induces a consumer to buy more than
what would have not been possible in the absence of the credit. Thus,
the consumers with more borrowing capacity consumes more than the
ones who borrow less.
9. Population of the Country: The population of the country also determines the
total domestic demand for a product of mass consumption. For a given level of
per capita income, tastes and preferences, price, income, etc., the larger the
size of the population the larger the demand for a product and vice-versa.
10. Distribution of National Income: The national income is one of the basic
determinants of the market demand for a product, such as the higher the
national income, the higher the demand for all the normal goods. Apart from
its level, the distribution pattern of the national income also determines the
overall demand for a product. Such as, if the national income is unevenly
distributed, i.e., the majority of the population falls under the low-income groups,
then the market demand for the inferior goods will be more than the other
category goods.
Thus, the demand for a commodity can be estimated or analyzed by studying the
determinants of market demand and the nature of the relationship between the
demand and its determinants