Determinants of Demand: 5 Determinants | Goods

The following points highlight the five determinants of demand. The determinants are: 1. The Price of the Commodity 2. The Prices of Related Goods (i.e., Substitutes and Complements) 3. The Income of the Buyer 4. Tastes and Preferences of the Buyer 5. Other Factors.

Determinant # 1. The Price of the Commodity:

The price of a commodity is the primary determinant of the amount of the commodity the consumer will buy at any time. Other things remaining the same, the higher the price charge a for a commodity, the less the amount of it a consumer will be willing to buy. The converse is also true. The lower its market price, the larger the number of units that will be demanded. At any particular price of a commodity an individual consumer will buy a definite quantity of it.

The amount of such purchase depends on two things:

(a) The utility received, and

(b) The price paid.

A consumer will always compare the benefits received from a com­modity with the sacrifice made before deciding on its purchase.

While the receipt of a commodity gives utility to a consumer, the con­sumer has to make some sacrifice in terms of price paid. Thus, when the price of a commodity falls, the consumer is required to make less sacrifice. So, he will buy more of the commodity. On the other hand, when the price of a commodity rises, the consumer is required to make more sacrifice and so less of its will be purchased. Thus, the primary determinant of the amount of a commodity a consumer will buy is its price.

Determinant # 2. The Prices of Related Goods (i.e., Substitutes and Complements):

The quantity demanded of a commodity is also determined by the prices of related goods. Thus, the demand for tea depends not only on its own price but also on the price of coffee, the price of sugar, the price of milk, etc. If the consumption of one commodity leads to a fall in the consumption of another commodity, they are called substitutes.

For example, the consumption of coffee is at the cost of tea. If the price of a substitute, such as coffee, increases, the demand for tea will rise, because tea is now relatively cheap and coffee is now relatively expensive (although nothing has happened to the absolute price of tea). In this case, the demand for tea changes in the same direction as the price of its substitute, viz., and coffee. The same thing is true of butter and margarine.

On the other hand, if the consumption of a commodity requires the consumption of another commodity they are called complements. Such commodities are jointly demanded. If the price of a complement, such as sugar, increases the demand for tea is likely to fall, because each cup of tea will now cost more.

The same thing is true of motor car and petrol. A rise in the price of petrol will lead to a fall in the demand for motor cars. The same thing is true of bread and butter. Thus, in such cases the demand for a commodity changes in the opposite direction with a change in the prices of its complements.

Determinant # 3. The Income of the Buyer:

The third important determinant of an individual’s demand for a commodity is his level of income. A rise in his money income, all other things remaining the same, is likely to increase his ability to buy. So, it will induce him to purchase a large quantity of each broad class of commodities and services such as food, clothing, shelter, entertainment and so on.

This means that, an increase in money income may cause a person to travel more frequently and in upper classes and may increase his demand for better accommodation. On the other hand, a fall in money income causes a general fall in the demand for goods and services which a consumer normally purchases. So, with a change in the money income of a buyer the demand for commodities and services consumed by him is likely to change.

Determinant # 4. Tastes and Preferences of the Buyer:

An individual’s demand for a commodity also largely depends on his taste and preference for a commod­ity. A person with a taste for fashionable articles, like modern furnisher, imported garments, costly perfumes, etc., will have a strong demand for these. But, these things may not have much appeal to a poor person with limited purchasing power.

With the change in tastes and preferences the demand for a commodity of an individual consumer is likely to change. For example, an individual may gradually develop a taste for coffee in which case his demand for tea will fall. Similarly, an individual may prefer for journey by train to journey by bus or a football match to a cricket match.

Determinant # 5. Other Factors:

There are various other factors which are also likely to affect an individual’s consumer demand for a commodity. Since these are external to and beyond the control of an individual, these are normally called environmental factors. And an individual’s demand for a commodity is determined by such environmental factors as the standard of living of the neighbours and friends, his social position and status and so on.

Of these various determinants of demand, the price of the commodity is considered to be perhaps the most important. However, in some cases, the money income of the consumer seems to be an equally important factor. A change in the market price of a commodity causes, as a general rule, a change in the quantity demanded of the same in the opposite direction provided various other factors governing individual demand remain unchanged.

In a like manner, a change in a person’s money income brings about a change in the demand for some goods and services, even though their market prices remain constant. For example, during the festival season most people buy new garments and shoes even though prices do not fall.

Sometimes, we observe that an individual’s tastes and preferences play an important role in determining individual demand. This is more so in case of people to whom a change in the price of a commodity is not a matter of much concern.

Four other factors may and often do affect the demand for a good.

These are called non-economic factors and are the following:

(a) Demographic and sociological factors:

Such factors include age, sex, marital status (i.e., whether an individual is married or not), health, the level of education, social status, place of residence (whether urban or rural) as also moral and religious values. The last set of factors may be influenced by family, peer group or political allegiance.

(b) Psychological factors:

Here, we include all the factors, inherited or acquired, that affect the personality of an individual and his taste and preference. We also include such factors as fads and fashions.

(c) Random variables:

Such factors include the weather, earthquakes, diseases, etc. These also include such unsystematic events as strikes, revo­lution, war, riots, etc.

(d) Government action:

The demand for a number of commodities may be affected by government action. Examples are: rules compelling the wearing of helmets by scooterists, statutory warning on cigarette smoking, banning the sale of non-veg food in certain parts of the country (such as Haridwar), regulations on the emissions from car exhausts, etc.

The permis­sion given to people by the Central and State Governments to use ball-point pens in writing answer-scripts in examinations, in signing cheques and various legal documents has raised the market demand for ball-point pens and a corresponding fall in the demand for fountain pens.