Factors affecting Demand/Demand Function/Determinants of Demand
Learning Contents:
· Determinants of Demand Function
Demand Function
Demand function shows
how demand for a commodity is related to various factors. What causes an increase
or decrease the demand? In the real world, there are some factors that cause an increase or
decrease in demand such as own price of the commodity, price of related goods,
income of the consumer, taste, and preferences, etc. Demand Function can be
classified into two types:
A.
Individual Demand Function
B. Market Demand Function
A. Individual Demand Function
Individual demand
function shows how demand for a commodity, by an individual consumer in the market is related to its various factors. Individual demand function is
expressed as
Dx=f
(PX, Pr , Y, T, E)
Here, Dx = Demand for Commodity x; PX = Price of the given Commodity x; Pr = Prices of Related Goods; Y = Income of the Consumer; T = Tastes and Preferences; E = Expectation of Change in Price in future.
1.
Own Price of Commodity (Px)
Keeping other things constant, Demand for a commodity is inversely related to its own price. In other words, Demand has an inverse relationship with the price of a commodity. When the price of a commodity increases, its demand falls. On the other hand, when the price of a commodity falls, then its demand increases. Hence, a consumer buys more of a commodity at a low price and less of a commodity at a high price. This shows an inverse relationship between price and the demand of a commodity is called Law of demand.
2.
Price of Related Goods (Pr)
Demand for a commodity
is also affected by a change in the price of related goods. They are classified
into two types:
2.1.
Substitute Goods
They are the goods
which can be used in place of one another such as Coke and Pepsi, tea and
coffee, etc. Consumers don’t find any difference except price during the purchase of
substitute goods.
Demand
for substitute good and price of another good is positively related to each
other.
For
e.g.
If the price of one good (Pepsi) increases, consumers will buy
less Pepsi because the Law of demand applies. At the same time, consumers
will increase the demand for another good (coke)
whose price has not been changed. Therefore, an increase in the price of Pepsi
leads to an increase in the demand for coke. We summarize this by saying that when
two goods are substitutes, there is a positive relationship between the price
of one good and the demand for the other good.
2.2.
Complementary Goods
They are the goods
which are consumed together such as Bread and Butter, Car and Fuel, Lock and
Key, etc. In the case of complementary
goods, consumption of one good is dependent upon the consumption of another.
Demand
for complementary good and price of another good is negatively related to each
other.
For
e.g.
If the price of one good (car)
increases, consumers will buy fewer cars because the Law of demand applies
and if we buy fewer cars, we will also buy less fuel (since they are used
together). Therefore, an increase in the price of cars leads to less
purchase of its fuel. We can summarize this by saying that when two goods are
complements, there is an inverse relationship between the price of one good and
the demand for the other good.
3.
Income
of the Consumer(Y)
Demand for the goods is
also related to the income of the consumer. How a consumer’s income is related
to the demand for the good also depends on what kind of good we are talking
about. To understand how income affects
the demand of goods we classify goods into two categories:
3.1 Normal Good
Normal Goods are goods
whose demand is positively related to the income of the consumer. When the
income of the consumer increases, the demand for the normal goods increases. On
the other hand, when the income of the consumer decreases, the demand for
normal goods decreases.
Normal goods such as television, smartphones, air conditioners, cars, etc. are few examples of normal goods. If the income of the consumer increases, he will purchase more of these goods. Therefore, increased income would influence the consumer to purchase more of normal goods.
3.2 Inferior Good
Inferior Goods are goods whose demand is negatively related to the income of the consumer. As the income of the consumer increases, the demand for inferior goods decreases.
On the other hand, when the income of the consumer decreases, the demand for inferior
goods increases.
Inferior goods are goods of low quality such as cheap cereals, grains, two-day-old discounted bread , etc. are few examples of
inferior goods. If the income of the consumer rises, he would buy less inferior
goods or would be motivated to buy superior goods. Therefore, increased income
would influence the consumer to purchase less inferior goods.
4. Tastes and Preferences(T)
The demand for goods and services also depends upon the taste and preferences of the consumer. Purchase of certain goods is also influenced by advertisement, change in fashion, climate, new inventions, culture, etc. A consumer if develops positive tastes and preferences for a particular good will purchase more of these goods. On the other hand, if he develops a negative or unfavorable taste and preferences for a good will buy less of these goods. For e.g. If certain goods go out of fashion, a consumer would no longer buy out-fashioned goods or his preferences would be shifted towards the purchase of a newly updated product. Therefore, decreases the demand for out-fashioned goods. Another example is the Endorsement of goods by a celebrity would increase the demand for these goods.
5. Consumer’s expectations with regard to future prices(E)
If a consumer expects that the price of a good will rise in future then, he will increase the present consumption of goods and will not wait for the future and therefore, demand will increase. On the other hand, if a consumer expects that the price of a good will fall in near future then he will decrease his present demand or buy less quantity of such goods and wait till the price falls in the future.
B.
Market Demand Function
Market demand for a consumer good is the sum of all
consumer demands at a given price in a particular period of time. Market demand
function shows how market demand or aggregate demand for a commodity is related
to its various factors. It shows the relationship between market demand for a
commodity and its various factors. It is expressed as under:
Mkt.Dx=
f (Px, Pr, Y, T, E, N, Np Yd)
Here, Mkt.Dx = Demand for
Commodity x; PX = Price of the given Commodity x; Pr = Prices of
Related Goods; Y = Income of the Consumer; T = Tastes and Preferences; E =
Expectation of Change in Price in future; N= Size of Population; Np = Nature of
Population; Yd= Distribution of Income.
Px, Pr, Y, T,
E have already discussed in Individual demand function. The remaining factors such
as (N, Np, and Yd) is explained as under:
1. Population Size(N)
Population size also influences the overall demand or market demand for a commodity. The number of consumers in the market and demand for a commodity are positively related to each other. A country with high population will have more demand for the goods than a country with less population. Higher the size of consumers, higher will be the demand. Lower the size of consumers, lower will be the demand. For e.g. Demand for housing is increasing due to an increase in the size of the population. Demand for food grains increases due to an increase in the size of the population. Another example, Stationery shops located near the college will have more demand for their products if more and more students join that college.
2. Nature of Population (Np)
Market demand is also influenced by the nature of the population. Consumers belonging to different age groups have a different set of preferences and their product requirements. For e.g. women are more attracted to fashionable products such as cosmetics, Handbags, and so on. Youngsters are more interested in gadgets like smartphones and bikes and so on.
3. Distribution of Income (Yd)
Market demand for a commodity also depends on how the income is distributed in the country. If income is not distributed equally i.e. showing inequality among rich and poor sections of the society. Rich people will increase the demand for luxury goods (Highly-priced watches, cars, smartphones, etc.) and poor people would be left to buy inferior goods (low-priced grains, milk, edible oil, etc.) Hence, income should be distributed equally in order to increase the overall market demand.
Multiple
choice questions based on the above topic
(Choose the correct
answer)
1.
Which of the following is not a determinant of a consumer's demand for a
commodity?
a. Price
of related goods
b.
Income of the consumer
c.
Taste
and Preferences
d.
Size
of Population
2. If the price of a good increases, then
a.
demand
for complementary goods will increase
b.
demand for substitute good will increase
c.
Both
a. and b.
d. None of the above
3. If consumer income declines, then the demand for
a.
normal goods will increase.
b.
inferior goods will increase.
c.
substitute goods will increase.
d. complementary goods will increase
4. A substitute is a good
a. of higher quality than another good.
b. that
is not used in place of another good.
c. that
can be used in place of another good.
d. of lower quality than another good.
5. The demand for a good increase when the price of a substitute ________ and also increases when the price of a complement ________.
a. falls; falls
b. rises; falls
c. rises; rises
d. falls; rises
6. Goods are bought together or
consumed together are known as
a. substitute goods
b. complementary goods
c. income goods
d. unrelated goods
7. Increase in the price of movie tickets increase the demand for the concert tickets is an example of
a. Substitution Factor
b. Taste and Preferences Factor
c. Income Factor
d. None of above
8. Which of the following is the non-price factor affect demand?
a. Taste and Preferences
b. Price of related goods
c. Income factor
d. All
the above
Answer Key
|
1.d |
2.b |
3.b |
4.c |
|
5.b |
6. b |
7. a |
8. d |
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