Lec 12 Determinants of demand

Determinants of demand
The demand for a product is influenced by a number of factors. Determinants of demand (also called factors affecting demand) are the factors which cause the demand curve to shift.

1. Determinants of demand Unit 12 Instructor: Atta Hussain Syed

2. DETERMINANTS OF DEMAND The demand of a product is influenced by a number of factors. Determinants of demand (also called factors affecting demand) are the factors which cause the demand curve to shift.

3. DETERMINANTS OF DEMAND Demand of a commodity may change. It may increase or decrease due to changes in certain factors. These factors are called determinants of demand.

4. Following are the determinants of demand for a product Price of the Product Price of related goods Tastes & preferences Income Expectations of consumers Effect of advertisement/advertisement expenditure Distribution of national income Population of the country Some other determinants DETERMINANTS OF DEMAND

5. 1.PRICE OF THE PRODUCT The demand for a good varies inversely with its own price. If the price of a commodity rises the demand for that commodity falls and vice versa.

6. 2.PRICE OF RELATED GOODS The price of related goods also affect the demand for a good. Related goods can be of two types, namely, substitutes and complementary goods.

7.  A.SUBSTITUTE GOODS A substitute good is a good that can be used in place of another. For example, tea and coffee, Coca-Cola and PEPSI, are substitute to each other.

8.  A.SUBSTITUTE GOODS The relation between demand for a product and price of its substitute is positive in nature.

9. B.COMPLEMENTARY GOODS Complementary goods are those goods that are demanded together. There is no use of one good without the other. The complementary goods are inversely related to each other. For example: Increase in the prices of petrol would decrease the demand of cars, similarly decrease in price of patrol would increase the demand of cars.

10. 3.TASTES & PREFERENCES Tastes and Preferences of consumers play a major role in influencing the demand of a product. The tastes and preferences of consumers are affected due to various factors, such as life styles, customs, common habits, and change in fashion, standard of living, religious values, age etc.

11. The income of a consumer affects his/her purchasing power, which, in turn, influences the demand for a product. Increase in the income of a consumer would automatically increase the demand for products by him/her, and vice versa.  4.INCOME

12.  4.INCOME The income-demand relationship can be analyzed by grouping goods into four categories: Essential consumer goods Inferior goods Normal goods Luxury goods

13. A.ESSENTIAL OR BASIC CONSUMER GOODS A physical item required by a consumer in order to sustain health or life. Refer to goods that are consumed by all the people in the society.

14. A.ESSENTIAL OR BASIC CONSUMER GOODS For example, food, water, soaps, cooking oil, clothes, as well as residential building materials that can be used to construct homes for shelter. The quantity demanded for basic consumer goods increases with increase in the income of a consumer, but up to a fixed limit.

15. B.NORMAL GOODS Refer to goods whose demand increases with increase in the consumer’s income. For example, goods, such as food, clothing, housing, health care, education, and vehicles are normal goods. These goods are demanded in relatively increasing quantity with increase in consumer’s income. Normal goods have positive income effect .

16. 1 Kg Rs.275 1 Kg Rs.95 C.INFERIOR GOODS Refer to goods whose demand decreases with increase in the income of consumers. Inferior goods have negative income effect .

17. C.INFERIOR GOODS For example, a consumer would prefer to purchase Ariel detergent instead of Bonus detergent with increase in his/her income. In such a case, Bonus detergent inferior good for the consumer. However, Bonus detergent can be normal good for people having lower level of income. Therefore, we can say that goods are not always inferior or normal; it is the level of income of consumers and their perception about the need of goods.

18. D.LUXURY GOODS Refer to goods whose demand increases with increase in consumer’s income. Luxury goods are used for the pleasure and esteem (respect) of consumers. For example, expensive jewellery items, luxury cars, antique paintings and air travelling.

19. INCOME DEMAND RELATIONSHIP CURVES

20. 5.EXPECTATIONS OF CONSUMERS Consumers expectations about further fall or rise in future prices also affect the present demand for a commodity. For example if consumers expect that future price of a product will increase, they will demand more to save money. Similarly, if they expect that future price of a product will decrease, they will decrease demand and wait to benefit from lower future price.

21. 6.ADVERTISEMENT EXPENDITURE Advertisement expenditure has a positive relationship with demand for a commodity. As the advertisement expenditure increases, the volume of sales also increases. Why advertisement expenditure is made?

22. Distribution of national income in a society affects the level of demand. If in a society the distribution of income is unequal then there will be many poor and few rich people. In such a society the level of demand is low. On the other hand, if the distribution of income is equal the level of demand will rise. 7.DISTRIBUTION OF NATIONAL INCOME

23. DEMAND FUNCTION The demand function is an algebraic expression of the relation between the demand for a commodity and its various determinants. DN = f (PN, PR, Y, T, E, O) WHERE DN = QUANTITY DEMANDED OF COMMODITY N. PN = PRICE OF THE COMMODITY N. PR = PRICE OF A RELATED COMMODITY. Y = INCOME OF THE HOUSEHOLD. T = TASTES & PREFERENCES OF THE HOUSEHOLD. E = EXPECTATION

24. EXTENSION AND CONTRACTION OF DEMAND Demand may change due to various factors. The change in demand due to change in price only, where other factors remaining constant, it is called extension and contraction of demand. When the quantity demanded of a commodity rises due to a fall in price, it is called extension of demand . On the other hand, when the quantity demanded falls due to a rise in price, it is called contraction of demand .

25. EXTENSION AND CONTRACTION OF DEMAND When the price of commodity is OP, quantity demanded is OQ. If the price falls to P2, quantity demanded increases to OQ2. When price rises to P1, demand decreases from OQ to OQ1. In demand curve, the area a to c is extension of demand and the area a to b is contraction of demand. As result of change in price of a commodity, the consumer moves along the same demand curve. It can be understand from the following diagram.

26. SHIFT IN DEMAND (INCREASE OR DECREASE IN DEMAND) When the demand changes due to changes in other factors, like taste and preferences, income, price of related goods etc. , it is called shift in demand. Due to changes in other factors, if the consumers buy more goods, it is called increase in demand or upward shift. On the other hand, if the consumers buy fewer goods due to change in other factors, it is called downward shift or decrease in demand.

27. Price (P) Quantity Demanded (Q) Increase in demand Decrease in demand Demand curve, D 3 Demand curve, D 1 Demand curve, D 2 SHIFT IN DEMAND ( INCREASE OR DECREASE IN DEMAND) The increase and decrease in demand (upward shift and downward shift) can be expressed by the following diagram.

28. SHIFT IN DEMAND (INCREASE OR DECREASE IN DEMAND) D1 is the original demand curve. Demand curve shift upward due to change in income, taste & preferences etc of consumer, where price remaining the same. In the above diagram demand curve D2 is showing upward shift or increase in demand and D3 shows downward shift or decrease in demand.