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Theory Of Demand

Meaning And Determinants Of Demand

We have often heard the phrase ‘there is a huge demand for product XYZ in the market’. But what does this exactly mean? What constitutes the demand for a product in the economy? Let us learn about the concept of demand and the determinants of demand in a market.

What is Demand?

Demand in terms of economics may be explained as the consumers’ willingness and ability to purchase or consume a given item/good. Furthermore, the determinants of demand go a long way in explaining the demand for a particular good.

For instance, an increase in the price of a good will lead to a decrease in the quantity that may be demanded by consumers. Similarly, a decrease in the cost or selling price of a good will most likely lead to an increase in the demanded quantity of the goods.

This indicates the existence of an inverse relationship between the price of the article and the quantity demanded by consumers. This is commonly known as the law of demand and can be graphically represented by a line with a downward slope.

The graphical representation is known as the demand curve. The determinants of demand are factors that cause fluctuations in the economic demand for a product or a service.

Meaning And Determinants Of Demand

Determinants of Demand

Some of the important determinants of demand are as follows,

1] Price of the Product

People use price as a parameter to make decisions if all other factors remain constant or equal. According to the law of demand, this implies an increase in demand follows a reduction in price and a decrease in demand follows an increase in the price of similar goods.

The demand curve and the demand schedule help determine the demand quantity at a price level. An elastic demand implies a robust change quantity accompanied by a change in price.  Similarly, an inelastic demand implies that volume does not change much even when there is a change in price.

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2] Income of the Consumers

Rising incomes lead to a rise in the number of goods demanded by consumers. Similarly, a drop in income is accompanied by reduced consumption levels. This relationship between income and demand is not linear in nature. Marginal utility determines the proportion of change in the demand levels.

3] Prices of related goods or services

  • Complementary products – An increase in the price of one product will cause a decrease in the quantity demanded of a complementary product. Example: Rise in the price of bread will reduce the demand for butter. This arises because the products are complementary in nature.
  • Substitute Product – An increase in the price of one product will cause an increase in the demand for a substitute product. Example: Rise in price of tea will increase the demand for coffee and decrease the demand for tea.

4] Consumer Expectations

Expectations of a higher income or expecting an increase in prices of goods will lead to an increase the quantity demanded. Similarly, expectations of a reduced income or a lowering in prices of goods will decrease the quantity demanded.

5] Number of Buyers in the Market

The number of buyers has a major effect on the total or net demand. As the number increases, the demand rises. Furthermore, this is true irrespective of changes in the price of commodities.

Solved Question on Determinants of Demand

Q: A rise in the price of petrol will ____ the demand for cars

  1. Decrease
  2. Increase
  3. Not affect
  4. None of the above

Ans: The correct answer is A. Petrol and car are complementary goods. The rise in the price of petrol will decrease the demand for cars in the market.

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