The following points highlight the ten main determinants of demand for a commodity. The determinants are: 1. Own Price 2. Prices of Related Goods 3. Income 4. Taste 5. Expected Price 6. Seasonal Factors 7. Advertisement 8. Quality 9. Government Policy 10. Environmental Concern.
1. Own Price – DX = f (PX):
First is the own price of the commodity. Other things remaining the same, there is usually an inverse relationship between the price and demand. However, such inverse relationship may not hold in some cases. In other words, one may observe direct relationship between price and demand in cases of certain commodities. This means that an increase in price leads to an increase in demand.
2. Prices of Related Goods—DX = f(Pa … Pc):
Secondly, the demand for a commodity depends on the prices of related goods, such as substitute goods and complementary goods. For substitute or competitive goods, one finds a direct relationship. Whenever there is an increase in the price of tea, its substitutes’, i.e., coffee’s, demand tends to rise. Again, two products often go together’.
This means that these products complement each other. Computer and computer software are complementary goods.
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As the prices of computer are falling almost regularly, not only its demand is increasing but also demand for software’s is increasing. Car and petrol are considered as complementary goods. If the price of petrol per liter rises demand for car declines. Thus, in this case, we find an inverse or negative relationship.
In Fig. 2.5, we have shown how demand for a commodity changes when the price of related good changes. In Fig. 2.5(a), we measure quantities of substitute goods on the horizontal axis (coffee) and price of another good, say tea, on the vertical axis.
As the price of tea rises from OP to OP1, coffee becomes cheaper and, as a result, its demand rises. That is why demand curve for substitute good is positive sloping indicating a direct relationship between price and demand.
In Fig. 2.5(b), we measure quantities of car on the horizontal axis white the price of its complementary, say petrol, is measured on the vertical axis. If the price of petrol declines from OP] to OP, there will be a tendency on the part of people to buy more cars. In view of this, demand curve is negative sloping for complementary goods indicating an inverse relationship between price and quantity demanded.
3. Income— DX= f(M):
Thirdly, income is another determinant of demand for a commodity. There are some commodities whose demand increases as money income of a consumer rises. However, a consumer may not necessarily behave in this way. He may buy less of a commodity when his money income rises. Such a commodity is called ‘inferior’ commodity.
In Fig. 2.6, we have drawn income- demand curve DD1 that shows the relationship between income and demand for a good. As income rises from OM1 to OM2, demand for ordinary food item goes up. Thus, it is a normal good. If income increases beyond OM2, its demand will fall. As ordinary food item becomes less attractive at a higher income, it is then called inferior good.
4. Taste—DX = f (T):
Fourthly, taste and preference of the consumer is another factor that determines the demand for a commodity. A consumer dictated by his own tastes wears dhoti and another consumer wears trousers. If a consumer shows preference for dhoti instead of trousers, his demand curve would shift to the right and a decreasing preference for dhoti would shift the demand curve to the left.
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The greater the shift in taste and preferences the larger is the shift of the demand curve—either in the rightward or in the backward direction. In fact, taste and preference is an element that considers nonmonetary determinants (e.g., modern style) of demand.
5. Expected Price—DX = f (E):
Fifthly, expectation of a consumer regarding the future change in the price of a commodity may lead to a change in the demand for a commodity. Demand for automobiles in India has gone down in recent times because buyers expect a further fall in its price in the near future.
6. Seasonal Factors—DX = f(S):
Sixthly, climatic conditions also influence the demand for a commodity. Demand for woolen garments rise during winter, while ice-cream has a larger demand during summer.
7. Advertisement—DX = f (A):
Seventhly, advertisement has an important bearing on the demand for a commodity. A consumer is often provoked to buy a commodity merely by its advertisement propaganda.
8. Quality—DX = f (Q):
Eighthly, quality and design of a product also exerts influence on quantity demanded. Consumer attaches importance to the quality of a product while buying. A good quality product should have a greater demand. Whenever the quality of a product suffers, buyers reduce their purchases and switch over to other related products whose quality is still not inferior.
9. Government Policy—DX = f (G):
Ninthly, demand for a commodity is also influenced by the policy of the government. Government, by imposing tax on a commodity, may curtail consumption of that commodity. Wine will be demanded less if taxes on it are increased. Similarly, government may encourage the consumption of a commodity by providing subsidy on it. People buy commodities at a cheaper price from shops run by the government.
10. Environmental Concern—DX = f (En):
Finally, global warming and pollution are causing heavy damage to our environment. People are demanding eco- friendly atmosphere.
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This environment-consciousness has an important bearing on the demand for a commodity. For instance, motor car emits carbon monoxide in large quantities leading to aggravation of many health problems. Now if people decide to use bicycle more and more instead of motor car, there will be a shift in demand.
All these determinants have been shown in a summary form in Fig. 2.7.
These are the factors that influence the demand for a commodity of a consumer. However, own price of the commodity seems to be the most important determinant of demand.
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To isolate various determinants of demand and to study the relationship between demand and own price of the commodity, economists make use of ‘ceteris paribus’ clause. To explain the constancy of demand determinants other than the own price of the commodity, we put a bar sign over them.
Thus, the demand function becomes:
