We
discuss below some of the important determinants of demand for a commodity:
1) Price of the commodity:
Normally there is an inverse relationship between the price of the commodity and the quantity demanded this means that lower the price of the commodity, larger is the quantity demanded and higher the price, lesser is the quantity demanded.
Price- rises , demand- falls
Price-falls , demand- rises
2)Income of the consumer :
Income determines the purchasing of the consumer. Generally there is a direct relationship between the income of the consumer and his demand for a product.
Income- rises , demand- rises.
However, this may not always be the case. Let see the relation between income and three different types of commodities consumed.
a) Normal goods: normal goods are those goods the demand for which increases with increase in income of the consumers and decreases with fall in income for example demand for clothes, refrigerator, television, cars etc.
Effect of change in consumer’s income on normal goods
1) Price of the commodity:
Normally there is an inverse relationship between the price of the commodity and the quantity demanded this means that lower the price of the commodity, larger is the quantity demanded and higher the price, lesser is the quantity demanded.
Price- rises , demand- falls
Price-falls , demand- rises
2)Income of the consumer :
Income determines the purchasing of the consumer. Generally there is a direct relationship between the income of the consumer and his demand for a product.
Income- rises , demand- rises.
However, this may not always be the case. Let see the relation between income and three different types of commodities consumed.
a) Normal goods: normal goods are those goods the demand for which increases with increase in income of the consumers and decreases with fall in income for example demand for clothes, refrigerator, television, cars etc.
Effect of change in consumer’s income on normal goods
 |
| normal goods |
The above figure
shows the income of the consumer plotted on y-axis and the quantity purchased
of a commodity is plotted on x-axis. The nature of relation between income and
demand for normal goods is shown by OA curve.
The curve shows a positive slope i.e.
when income is y quantity demanded is Q and when income increases to Y1
quantity demanded increases to Q1 and vice versa, indicating that
demand for such goods increases with increase in income and falls with fall in
income.
b) Inferior goods: those goods the demand for which falls with increase in income of the consumer example maize, jowar, bajra etc.
b) Inferior goods: those goods the demand for which falls with increase in income of the consumer example maize, jowar, bajra etc.
Effect of change in consumer’s income on inferior
goods
 |
| inferior goods |
The
relation between income and demand for inferior good is shown by the curve OB in
the above figure. Demand for such goods may intially increase with increase in income upto y.
when OQ is the quantity demanded, but the quantity demaned decrease as income increase beyond y. i.e. when the income is OY1 quantity demanded is OQ1.
The demand for inferior goods may decrease when income increases beyond a particular level because the consumers may substitute it by superior food like wheat or rice.
c) Inexpensive goods of necessities: those goods which are necessary for the consumer and are cheap for example salt, matchbox etc.
Effect of change in consumer’s income on inexpensive
goods
 |
| inexpensive goods |
Beyond OY level of income , where OQ
quantitiy is demanded , OC curve becomes a vertical straight line thereafter ,
indicating, that a further increase in income doesn’t lead to any increase in
demand, it remain constant irrespective of the level of income.
This functional relationship between the demand for
a commodity and the level of income is known as income demand.
3) Consumers taste and preferences:
This depends on social customs,habits of the people, fashion and lifestyle of the people etc.
For example consumers tastes and preferences change because of change in fashion, as a result people switch over from the cheaper old fashioned goods to costlier ‘mod’ goods.
The physical fitness craze leading to an increase in demand for bicycles is another example.
3) Consumers taste and preferences:
This depends on social customs,habits of the people, fashion and lifestyle of the people etc.
For example consumers tastes and preferences change because of change in fashion, as a result people switch over from the cheaper old fashioned goods to costlier ‘mod’ goods.
The physical fitness craze leading to an increase in demand for bicycles is another example.
4) Prices of related goods:
demand is also affected by the change in price of other related goods.There are two types of related goods
demand is also affected by the change in price of other related goods.There are two types of related goods
a)Substitute goods
b)Complementary goods
a) Substitute goods:
goods which satisfy the same type of demand and can be used in place of one another for example tea and coffee,coke and pepsi etc.
There is a direct relation between
the demand for a product say tea and the price of its substitute say coffee as
shown by upward sloping curve AB in the above figure.
There is an inverse relation
between the demand for a product say car and the price of its complement say
petrol as shown by downward sloping curve MN in the above figure.
goods which satisfy the same type of demand and can be used in place of one another for example tea and coffee,coke and pepsi etc.
 |
| substitute goods |
At initial price OP of
coffee quantity demanded for tea is OQ, when price of coffee rises to OP1,
quantity demanded for tea increases to OQ1 because many consumers
will shift from the consumption of coffee to tea, as tea is now relatively
cheaper.
Here demand for tea increased not because of a fall in its own price but due to an increase in the price of its substitute-coffee.
When price of coffee falls to P2, quantity demanded for tea will fall as now coffee has become cheaper as compared to tea,so people will shift from tea to coffee.
Here demand for tea increased not because of a fall in its own price but due to an increase in the price of its substitute-coffee.
When price of coffee falls to P2, quantity demanded for tea will fall as now coffee has become cheaper as compared to tea,so people will shift from tea to coffee.
Price of coffee- rises , demand for tea- rises
Price of coffee- falls , demand for tea- falls
b) Complementary goods:
Goods that are used jointly or consumed together to satisfy a given want like car and petrol, gas and gas stoves, pen and refill etc.
Price of coffee- falls , demand for tea- falls
b) Complementary goods:
Goods that are used jointly or consumed together to satisfy a given want like car and petrol, gas and gas stoves, pen and refill etc.
 |
| complementary goods |
When price of
petrol is OP, demand for cars is OQ.When price of petrol rises to P1,
demand for cars fall to OQ1 and when price of petrol falls to P2,
demand for cars increases to Q2.
Thus, in case of complementary goods an increase in the price of one decreases the demand for others, as both the goods are used together.
Thus, in case of complementary goods an increase in the price of one decreases the demand for others, as both the goods are used together.
Price of petrol-
rises ,
demand for cars- falls
Price of petrol- falls , demand for cars- rises
Price of petrol- falls , demand for cars- rises
The way demand for one particular product is
affected by a change in the price of another product is known as cross demand
or cross price effect.
5) Consumer Expectation:
If a consumer expects a rise in the price of a commodity in future,quantity demanded for that commodity will increase today,to avoid higher price in future.
If people expect a rise in their income, they will buy more in anticipation of rise in their income.
If a consumer expects scarcity of any commodity in future may be due to strike,crop failure etc.the current demand for such commodities will increase.
If a consumer expects a rise in the price of a commodity in future,quantity demanded for that commodity will increase today,to avoid higher price in future.
If people expect a rise in their income, they will buy more in anticipation of rise in their income.
If a consumer expects scarcity of any commodity in future may be due to strike,crop failure etc.the current demand for such commodities will increase.
6) Consumer-credit facility:
If consumers are access to easy credit facilities or borrow from banks, they would be tempted to purchase certain goods they could not have purchased otherwise for example car loans, house loans etc.
If consumers are access to easy credit facilities or borrow from banks, they would be tempted to purchase certain goods they could not have purchased otherwise for example car loans, house loans etc.
7) Size and composition of population:
Population- rises
demand for commodity- rises
Population- rises
demand for commodity- rises
number of consumers- rises
Composition of population also affects the demand because the types of goods demanded by
different people are different.
for example if the number of teenagers in the population of a country increases, the demand
for goods that they tend to buy such as jeans, watches,etc. will increase.
Composition of population also affects the demand because the types of goods demanded by
different people are different.
for example if the number of teenagers in the population of a country increases, the demand
for goods that they tend to buy such as jeans, watches,etc. will increase.
8) Distribution of Income:
Unequal distribution – leads to more demand for luxury goods
Unequal distribution – leads to more demand for luxury goods
Equal distribution- leads to more demand for essential
commodities
9) Government
Policy:
Economic Policy also influences the demand for commodities.
If the government imposes taxes on various commodities in the form of sales tax,excise duties,etc. the price of the commodities will increase, resulting in the fall in demand.
If the government incur expenditure on the construction of roads, bridges etc. the demand for goods needed for construction will increase.
Economic Policy also influences the demand for commodities.
If the government imposes taxes on various commodities in the form of sales tax,excise duties,etc. the price of the commodities will increase, resulting in the fall in demand.
If the government incur expenditure on the construction of roads, bridges etc. the demand for goods needed for construction will increase.
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