Determinants of Demand

Demand is an economic principle that explains the relationship between prices and consumer behaviors due to changes in goods and services. Although many economic factors affect the demand for goods and services, those factors are called determinants of demand.

• The term "determinants of demand" refers to these variables, which influence demand for products and services despite numerous economic factors.
• The economic principle of demand demonstrates the relationship between prices and consumer behavior as a result of changes in goods and services. 
• The top ten determinants of demand are the prices of goods or services, the price of complementary/substitute goods and services, buyer's tastes and preferences, buyers' expectations of the good's future price, changes in buyers' real incomes or wealth, number of buyers, government policies, climate changes, and income distribution.
• All business firms should consider making their marketing strategies, which are opted for by all new businesses, to launch their products in the market.

#1 - The Prices of Goods or Services

When the price of goods and services rises, the quantity demanded falls. When the price of goods and services falls, the quantity demanded will increase. It is also called the Law of Demand.

If demand does not change even in the price change, that is called inelastic demand. On the other hand, elastic demand is called if the quantity demanded changes more than the price change.

#2 - Price of Substitute/Complementary Goods & Services

Substitute goods are goods that satisfy the same needs. For example, groundnut oil-sunflower oil and tea-coffee are substitutes. Hence, a rise in groundnut oil price can increase the demand for sunflower oil and vice-versa.

Complementary goodseconomic recession.

#5 - A Change in Buyers' Real Incomes or Wealth

Buyers' purchasing power is dependent on their incomes and wealth. Suppose we see it in the non-developed areas where jobs are not easily available, and people do not have much income. Hence, the demand for goods and services is much lower than the developed cities like New York, where many jobs are available. Therefore, people have good income and purchasing power, and demand for goods and services is high.

That can be very easily distinguished in the case of luxurious goods in the cities where more jobs are available. Therefore, demand for luxury goods is always higher than in cities where job opportunities are lesser. Thus, consumption is based not only on income but also on higher consumption and vice versa.

#6 - Buyers' Expectations of their Future Income and Wealth

The higher expectation of future income & wealth increases consumption, and a lower expectation of future revenue will reduce consumption.

For example, students who will complete higher studies and are about to join the job will start spending more than the salaries of people who will retire in the coming years.

#7 - The Number of Buyers

If there is an increase in the number of buyers willing to buy goods or services affects the overall demand. The population has a large influence on the market. Population increase can create a makeshift in the demand curve.

The new buyers help raise the quantity demand, so demand changes even if the price does not change.

#8 - Government Policies

For many products, demand is dependent on government policies. For example, a decrease in the borrowing interest rate leads to raising housing loan demands because people will start buying houses since the loan interest rate is reduced.

Another example is the U.S. government has banned a few models of Volkswagen due to pollution issues. Hence, there is no demand for those models in the U.S. taxation affects product demand. A rise in tax leads to an increase in product prices, leading to a decrease in the need for that product.

#9 - Climate Changes

There are many products for which demand is seasonal or dependent on the climate.

For example, demand for winter clothes is high in the winter season, and demand for ice creams is higher in the summer season. So, when winter is going to end, and there is no need for winter clothes, companies sell winter clothes at discounted prices. There are discount sales in the shops and malls after the season ends. This discounted offer helps the sellers to increase the demand.

#10 - Income Distribution

Luxurious goods are high in the area where very rich people are staying. On the other hand, in non-developed places where middle-income groups people visit, the demand for luxury goods is less.

#1 - Demand Equation

Quantity Demand (QD) = f (Prices of goods or services, price of substitute/complementary goods and services, buyers' tastes and preferences, buyers' expectations of the goods' future price, change in buyers' real incomes or wealth, buyers' expectations of their future income and wealth, the number of buyers, government policies and climate changes, income distribution).

#2 - Upward & Downwards Shift in the Demand Curve

Below diagram (i) represent an upward shift in the demand, and (ii) represents a downward shift in the demand curve. It represents the change in demand for goods and services consumed at a given price.

When demand is increased, it means the demand curve will shift to an upward/right shift,

And if demand is decreased, the demand curve will shift downward/left.

All these demand determinants are important. All business firms should consider making their marketing strategies, which are considered by all new businesses, to launch their products in the market.

This article is a guide to the Determinants of Demand and its definition. We discussed the top 10 determinants that derive demand in an economy with examples. You can learn more about Excel Modeling from the following articles: -

• What is Shrinkflation?
• Quantity Demanded
• Unitary Elastic Demand
• Elastic Demand
• Non-Price Determinants of Demand