The price of a product determines how much people will buy that particular product. When the price of a normal good increases, the quantity demanded for that product decreases. This is when other factors that determine demand remains unchanged. When the other factors do change, the the prevailing conditions of the demand for the product changes. These are known as ‘determinants of demand’. Let us look at the factors other than price which influence demand.
When income rises, it is expected that the demand for goods will also rise. When people have more money, they may decide to spend the money doing things that they were not able to do before. That means the demand for normal goods will rise when the income rises. Most of the goods in the economy are normal goods. However, as the income rises, people may stop or reduce the use of certain goods. These types of goods are known as inferior goods. The most well known example is public transportation – more specifically, buses. As the income rises, people may use cabs rather than travelling on buses.
If you watch your favourite shows on TV or movies on a channel, you will always have to bear with advertisements that annoyingly interrupt the main programme. In many Indian channels, the time given to the advertisements has increased ridiculously too much. Hundreds of billions of Dollars are spend worldwide on advertising each year.
But the question is, why are businesses prepared to spend so much on advertising? The reason is that it does affect demand. If a product is heavily advertised, the demand for that product is likely to increase, especially if the advertisement campaign is effective.
The size and the structure of population
As the population grows, there will be an increase in demand for goods and services. The more people are there, the more needs and wants are required to be satisfied. It’s not only the size of the population that affects demand, but the structure of the population also affects the demand. Examples of this are:
- Age distribution – Many countries are now experiencing a trend of ageing population. The reasons for this are, the rising life expectancy and/or reduced birth rate. As the median age of the population rises, there will be more elderly people and thus increased demand for goods such as retirement homes and specialist holidays for elderly people.
- Gender distribution – Census in many countries has shown that there are more women than men in those countries. And the number of women to men is higher in older age groups. This would affect the demand patterns. For example, there will be more demand for women’s clothing.
- Geographical distribution – As a country starts developing and goes up in development, there is a tendency of the population to move to urban areas. This will increase in demand for goods and services in urban areas.
Tastes and Fashion
There are certain goods of which demand is strongly influenced by taste and fashion. Some goods also experience seasonal demand. Clothing industry is a good example of this. The fashion keeps on changing. One type of dresses high in demand now may not be in anymore after 1 year. Some types of clothes are demanded at winder, and some other types are demanded at summer.
Prices of substitutes and complements
When consumers consider buying a good, they usually consider the prices of other goods which can be used instead of that particular good. These goods are known as substitutes. For example, Pepsi is a direct substitute of Coca-Cola. If the price of Coca-Cola decreases, the demand for Pepsi will be decreased. Different types of energy drinks are close substitutes of one another. If cheap substitutes are available, consumers will opt to buy the cheaper ones. Therefore, the changes in the prices of substitutes affect demand for a particular good.
Complementary goods are those goods which are demanded together with a particular good. For example, consumers of corn flakes will also buy milk. Therefore, changes in the price of one of these products will affect the demand for the other good.
The demand for certain goods is influenced by the interest rate. That is because these goods are purchased with borrowed money (loans). If interest rate increases, it becomes difficult for people to take loans and purchase those goods. Goods often bought with borrowed money include houses, cars, holidays and expensive consumer durable goods.
Increase in taxes such as income tax will reduce demand in the market because people will have less disposable income.
Interest rates and taxes are the instruments that the government uses to manipulate demand in the economy.