A Business Encyclopedia

Determinants of Market Demand

Definition: The Market Demand is defined as the sum of individual demands for a product per unit of time, at a given price. Simply, the total quantity of a commodity demanded by all the buyers/individuals at a given price, other things remaining same is called the market demand.

There are several factors that determine the demand for a product. These are:

Determinants of market demand

  1. Price of the Product: The price of a product is the most important determinant of market demand in the long-run and the only determinant in the short-run. As per the law of demand, the price of a product and its quantity demanded are inversely related, i.e. the quantity demanded increases when the price falls and decreases when the price rises, other things remaining the same.

    Here, other things imply that the income of the consumer, the price of the substitute and complementary goods, tastes and preferences and the number of consumers, all remains constant. The price-demand relationship has more significance in the oligopolistic market structure in which the result of a price war among the firm and its rival decides the level of success of the firm.

  2. Price of the Related Goods: The market demand for a commodity is also affected by the changes in the price of the related goods. The related goods may be the substitute or complementary goods. Two commodities are said to be a substitute for one another if they satisfy the same want of an individual and the change in the price of one commodity affects the demand for another in the same direction. Such as, tea and coffee, Maggi and Yippie, Pepsi and Coca-Cola are close substitutes for each other. The increase in the price of either commodity the demand for the other also increases and vice-versa.

    A commodity is said to be a complement for another if the use of two goods goes together such that their demand changes (increases or decreases) simultaneously. For example, bread and butter, car and petrol, mattress and cot, etc. are complementary goods. The increase in the price of either commodity the demand for another decreases and vice-versa.

  3. Consumer’s Income: The income is the basic determinant of the quantity demanded of a product as it decides the purchasing power of the consumers. Thus, people with higher disposable income spend a larger amount of income on consumer goods and services as compared to those with lower disposable income. Consumer goods and services can be grouped under four categories: essential goods, inferior goods, normal goods, and prestige or luxury goods. The relationship between the consumer’s income and these goods is explained below:
  • Essential Consumer Goods: The essential goods are the basic necessities of the life and are consumed by all the persons of the society. Such as food grains, salt, cooking oil, clothing, housing, etc., the demand for such commodities increases with the increase in consumer’s income but only up to a certain limit, although the total expenditure may increase with respect to the quality of goods consumed, other things remaining the same.
  • Inferior Goods: A commodity is deemed to be inferior if its demand decreases with the increases in the consumer’s income beyond a certain level of income and vice-versa. For example, Bajra, millet, bidi are the inferior goods.
  • Normal Goods: The normal goods are those goods whose demand increases with the increase in the consumer’s income, such as clothing, household furniture, automobiles, etc. It is to be noted that, demand for the normal goods increases rapidly with the increase in the consumer’s income but slows down with a further increase in the income.
  • Luxury Goods: The luxury goods are those goods which add to the prestige and pleasure of the consumer without enhancing the earnings. For example, jewelry, stone, gem, luxury cars, etc. The demand for such goods increases with the increase in the consumer’s income.
  1. Consumers’ tastes and preferences: Consumer’s Tastes and preferences play a vital role in determining a demand for a product. Tastes and preferences often depend on the lifestyle, culture, social customs, hobbies, age and sex of the consumers and the religious sentiments attached to a commodity. The change in any of these factors results in the change in the consumer’s tastes and preferences, thereby resulting in either increase or decrease in the demand for a product.
  2. Advertisement Expenditure: Advertisement is done to promote sales of a product. It helps in stimulating demand for a product in four ways; by informing the prospective consumers about the availability of a product, by showing its superiority over the competitor’s brand, by influencing the consumer’s choice against the rival product and by setting new fashion and changing tastes of the consumers. The effect of advertisement is said to be fruitful if it leads to the upward shift in the demand curve, i.e. the demand increases with the increase in the advertisement expenditure, other things remaining constant.
  3. Consumers’ Expectations: In the short run, the consumer’s expectation with respect to the income, future prices of the product and its supply position plays a vital role in determining the demand for a commodity. If the consumer expects a high rise in the price of the commodity, shall purchase it today at a high current price so as to avoid the pinch of the high price in the future. On the contrary, if the prices are expected to fall in the future the consumer will postpone their purchase with a view to avail benefits of lower prices in the future, especially in case of nonessential goods.

    Likewise, an expected increase in the income increases the demand for a product and vice-versa. Also, in the case of scarce goods, if its production is expected to fall short in the future, the consumer will buy it at current higher prices.

  4. Demonstration Effect: Often, the new commodities or new models of an existing product are bought by the rich people. Some people buy goods due to their genuine need for them or have excess purchasing power. While some others do so because they want to exhibit their affluence. Once the commodity is in very much fashion, many households buy them not because they have a genuine need for them but their neighbors have purchased it. Thus, the purchase made by such people arises out of feelings as jealousy, equality in society, competition, social inferiority, status consciousness. The purchases made on the account of these factors results in the demonstration effect, also called as Bandwagon Effect.
  5. Consumer-Credit Facility: The availability of credit to the consumer also determines the demand for a product. The credit extended by sellers, banks, friends, relatives or from other sources induces a consumer to buy more than what would have not been possible in the absence of the credit. Thus, the consumers with more borrowing capacity consumes more than the ones who borrow less.
  6. Population of the Country: The population of the country also determines the total domestic demand for a product of mass consumption. For a given level of per capita income, tastes and preferences, price, income, etc., the larger the size of the population the larger the demand for a product and vice-versa.
  7. Distribution of National Income: The national income is one of the basic determinants of the market demand for a product, such as the higher the national income, the higher the demand for all the normal goods. Apart from its level, the distribution pattern of the national income also determines the overall demand for a product. Such as, if the national income is unevenly distributed, i.e., the majority of the population falls under the low-income groups, then the market demand for the inferior goods will be more than the other category goods.

Thus, the demand for a commodity can be estimated or analyzed by studying the determinants of market demand and the nature of the relationship between the demand and its determinants


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