Meaning and Determinants of Demand
The understanding of the term “demand” is very important before we make you able to learn its determinants. Demand is your willingness combined with your financial ability to buy goods or services. If you want to have a product but have no money to acquire it, it isn’t called demand. You also need to have the financial power and vice versa.
For example, you may be desiring to own a car but you have a paucity of budget to afford it, it isn’t your demand. When you have both financial capacities as well as willingness to buy your desire car, it is called demand. Here are 6 major factors that determine the demand for a product or service.
Determinants of Demand
- Price: The price is of many important factors that determine the demand for goods and services. How the price is a demand determinant can be understood when we refer to the Law of Demand that states ” Demand for a product shows an increase when its price decreases and its demand decreases when we bring down its price. For example, coffee grows in demand when its price falls, and vice versa.
- Price of substitutes and complementary goods: The availability of substitutes and complementary goods also determines the demand for a product or service. For example, tea and coffee are substitutes, meaning we can use one for the other as both serve the same need. When the price of tea increases, people will naturally buy more coffee, and when the price of coffee increases, they will buy more tea. The complementary goods are those we use together. For example, milk and bread. If the price of milk increases, it is obvious that the demand for bread will decrease.
- Income: The income of your customers is a basic demand determinant. Their level of income will surely affect their demand for your products. When consumers possess a good income, that means they can afford many goods and services and when they don’t, they won’t be able to make purchases. They will buy more when their monthly income is higher and vice versa.
- Tastes and Preferences: We all know that our customs, religious values, lifestyle, and our society as a whole shape up our tastes and preferences. We can’t buy alcohol as it goes against our religious values or we can not eat meat as our religion doesn’t permit it. The demand for products will never pick up as long as it goes against our lifestyle, customs, and religious values. We would reduce or avoid the consumption of products that go against our social norms.
- Expectations: We probably will not buy gold now when we expect that its price will decrease after two months of time. We will also buy more gold now if we expect its price increase after two months.
- Demonstration effect: Rich people in our society are the first people who buy newly launched products by companies in order to express their affluence. It is called a demonstration effect. When a product on the other side becomes very common in our societies, these rich people give up their use, thereby affecting their demand. This effect is called a snob effect.