The economy is the heart of a nation. Without a stable economy, it is very hard to run the country and feed the citizens. The demand and supply of the products and services should run in a smooth manner to let the economy prosper in the perfect way.
There are many factors that lead to an increase and decrease in the demand for products and services. It is very important to know what are the determinants of demand so that you can understand the working of an economy in a better way.
Mainly, there are the following 5 determinants of demand. We will understand these determinants in detail and know how they contribute to the change in demand. Reading the complete post will interest you to know more about the working of a nation’s economy so keep following the track and know about these demand shifters.
Price is an important factor that determines the demand for a product or service in the market. There is an inverse relationship between demand and price.
If the price of a product or a service rises then obviously the demand will fall as not all the consumers will be able to afford the high price. It depends on how much rise is made in the price if the rise is not much then demand won’t be affected that much but if there is a high price rise done then demand will be significantly affected.
Similarly, if the price falls down then demand will increase as more and more people will come to buy that product or service.
A demand curve is plotted to see the fluctuations in demand with respect to price considering all other factors remaining the same.
There are two terms here: one is elastic demand and the other is inelastic demand. Elastic demand refers to the scenario when demand is sensitive to price, which means that demand increases/decreases when price changes. Inelastic demand refers to the scenario when demand is not sensitive to price, it means that changing the price doesn’t change the demand for the commodity or service.
Income is another crucial parameter that decides the demand for a product or a service. Imagine if the income of everyone is high and can bear the costs of the product even if its price increases then the demand for that product won’t go down. Even if a recession is there, people having a high income will continue buying that product or a service depending on its essentiality.
So, income is a crucial parameter that decides the demand for a commodity. Low income will bring the demand for that commodity downwards so the government has to make sure that everyone has a constant source of money, i.e. job so that their purchasing power doesn’t get affected.
If people get jobless which happens at the time of recession or a crisis then the demand for that commodity is severely affected depending upon its essentiality as no one has an income to buy it.
Now, there is a concept of marginal utility that comes into account when income comes. Marginal utility says that the second unit of a good or service is a little less useful to you than the first. Even if your salary doubles, you are only going to buy more units of that product or service if it is useful to you. There will be some point of time where you won’t require more units of that product and its marginal utility will come to zero.
Prices of Complementary/Substitute products
Not only the price of the product matters to its demand but the price of its complementary goods or services and its substitute products also affect its demand.
Let’s understand it with an example: If the price of coffee beans increases then café owners will be forced to increase the price of coffee as well. This will affect the demand for the coffee as fewer people will come to drink it in the café.
This can be understood with another example where let’s suppose the price of diesel rises to the top. It will affect the demand for diesel vehicles as well. So, you see here, rise/fall in complementary products affects the demand for the products/ services associated with it.
Now, let’s understand the scenario of the substitute products. The substitute for a Dell laptop will be a Lenovo or an HP laptop. So if the prices of Dell laptops rise then its substitute will get an advantage for this and their demand will increase and if the price of Dell laptops falls down then the substitute products will face a steep decrease in demand if all other factors remain constant.
Taste and Choice
If the taste of consumers changes then the demand will be highly affected. If the trend shows an increase in the number of people preferring the product or service then demand will increase but if people start preferring some other substitute or just stop using the product or service altogether due to some of the other reason then demand will fall and so will be the sales.
In this case, it is very important to understand why the taste of consumers changed. Marketing and branding play a crucial role in attracting the customers and it can help to change the taste and preference back.
Number of buyers in the market
If the number of buyers in the market increases then the demand will increase too. This has nothing to do with the price, even if prices don’t change, demand will increase as there are now more buyers who want that product or service. Similarly, sales fall down as the demand drops when a large number of buyers exit the market.
So, here was an overview of what are the determinants of demand. I hope you got clear information about it and now know how the demand for a product, goods, or service increases and decreases.
You can take any product or item that you use in your day-to-day life and analyze its demand, know what are the factors that lead to the change in its demand and this will help you to know the economy in a better and more practical way. For more information, visit Financeshed.