In this article we will discuss about the determinants of an individual’s demand for a good and also of the market demand for the good. The determinants are: 1. Own Price of the Good 2. Indifference-Preference Pattern of the Buyers 3. Income of the Buyers 4. Prices of Related Goods 5. Governmental Policy 6. Distribution of Income and Wealth 7. Number of Potential Buyers.
Determinant # 1. Own Price of the Good:
An individual’s demand and the market demand for a good would depend upon its own price. The law of demand states that as the price of a good decreases or increases, “other things” remaining constant, its quantity demanded by the existing buyers would, respectively, increase or decrease.
Also, as the price of good decreases, new buyers would enter the market and its demand would be boosted up, and, as the price increases, some of the existing buyers would go out of the market, further dampening the demand.
Determinant # 2. Indifference-Preference Pattern of the Buyers:
At any particular price, individual buyers’ demand, and therefore, the market demand for a good would depend upon the preference-indifference pattern of the buyers. The preference-indifference pattern of the buyers again would be influenced by the tastes and habits of the buyers, their religions and social customs, advertisement for the goods, etc.
Determinant # 3. Income of the Buyers:
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At any particular price, the demand for a good also depends on the income level of the buyers. Generally, as the level of income of the buyers increases or decreases, the demand for a good at any particular price also increases or decreases for most of the buyers. In this case, the commodity concerned is called a normal good.
But there may be some buyers who would decrease or increase their quantity demanded at the said price, along with an increase or decrease in their income. For them the good is called in inferior good.
If a good is a normal good for most of the buyers and it is an inferior good for a few buyers, the market demand for the good at any particular price would increase or decrease as the income of the buyers increases or decreases.
Determinant # 4. Prices of Related Goods:
The demand for a good is also influenced by the prices of the related goods.
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The nature of relation between the goods may be of two types:
Relation of substitutability and relation of complementarity. Any two goods may be substitutes of each other if one of them can be used for the other. Examples are tea and coffee, bus service and train service, etc.
If the price of the substitute for a particular good decreases or increases, then the demand for the substitute would increase or decrease, and the demand for the good (under consideration) would decrease or increase. That is, the relation between the demand for a particular good and the price of its substitute is direct or positive.
Now come to the complements. Any two goods may be complements of each other if they are used simultaneously. Examples of complementary goods are tea and sugar, tennis ball and tennis racket, and so on.
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If the price of the complement of a good decreases (increases), then the demand for the complement would increase (decrease) and the demand for the good (in question) would also increase (decrease). That is, the relation between the demand for a good and price of its complement is inverse or negative.
Determinant # 5. Governmental Policy:
Sometimes the individual demand and market demand for the goods may be influenced by the monetary and the fiscal policies of the government. Monetary policy of the government is concerned with changes in the rate of interest and supply of money. On the other hand, the fiscal policy of the government deals with taxation, government debt, etc.
Determinant # 6. Distribution of Income and Wealth:
Distribution pattern of income and wealth is sometimes changed through the taxation policy of the government and through economic planning. As a consequence of this, demand for different goods may change. The more equal the distribution of wealth and income would be, the more would be the individual demands for different goods.
For, when the income of the poorer classes increases, they increase demand for goods, and when the income of the richer classes is curtailed, they do not considerably decrease their consumption—they may rather reduce their saving.
On the other hand, if the distribution of income and wealth becomes more unequal, the poor becomes more poor and the rich becomes more rich. Now the poorer classes are forced to reduce their consumption, but the rich would not considerably increase their consumption for they had been already purchasing what they needed.
Therefore, if the inequality in income and wealth increases, the net result would be that the demand for goods and services would diminish.
Determinant # 7. Number of Potential Buyers:
If the population of a country increases through birth or through immigration, the number of potential buyers, and the market demand for the goods, may increase at each price. Also, through rural-urban migration within a country, the number of buyers and the demand for goods may increase in some regions. For example, if population increases in urban areas, demand for goods may increase in those areas.
Demand Function and Demand Curve:
There are many determinants of the demand for a good. Some of these are—own price of the good, prices of related (substitute and complementary) goods, income of the present and the potential buyers, number of buyers, tastes and habits and preferences of the buyers, etc. The functional relation of dependence between the demand for a good and its determinants is known as the demand function for the good.
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Therefore, the demand function for a good may be written as:
q = f (p, y, ps, pc, t, n) (1.1)
where q = quantity demanded of the good per period;
p = (own) price of the good;
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y = index of income of the buyers;
ps = index of prices of the substitute goods;
pc = index of prices of the complementary goods;
t = index of tastes and habits of the buyers;
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n = number of buyers.
(1.1) is the general form of the demand function. It tells that there is a relationship of dependence between q and p, y, ps, pc, t, and n. But to know how and to what degrees q depends on p, y, etc., obtain the demand function in a specific form.
If the relation between q and p, y, etc. is linear, then (1.2) below gives a specific form of the demand function:
q = a1p+ a2y + a3ps + a4pc + a5t + a6n
where a1, a2, etc. are very important constants.
The coefficient a1 gives the rate of change of q w.r.t. p (i.e., ∂q/∂p). For example, a1 = −4, i.e., ∂q/∂p = −4, if price of the good increases by one unit of money, then the demand for the good would fall by four units. The other ‘a’-coefficients have similar meanings.