Determinants of Demand

Published on April 02, 2020

Definition of Demand in Economics

In economics, demand refers to the willingness of a consumer to buy a product or service. Only willingness to purchase an item or a service does not mean demand. The consumers must be ready to pay a price for the goods or services that he wants to buy or avail.

Definition of Demand in Economics

Relation of Demand and Price

The quantity of a good a consumer is willing to buy depends on various factors but the price of that commodity or service is of the utmost importance. Economists believe that demand and price have inverse relation which means that if the price of an item is increased, the demand drops and if the price of an item is decreased, the demand soars. This is called the Law of Demand. The Demand Curve Shows the relationship between Price and Demand. It is noticeable that if other factors (discussed below) change the demand curve shifts. 
qrelationship betrween demadn and price

Demand Determinants

  • Price of Other Goods: The Demand of a good is also influenced by prices of other goods.
  • Complements: These goods are usually consumed jointly or together. Examples may include: fuel & car, shoes & socks, Peanut Butter & jelly etc.
  • The price change in one of the good influences the demand of the other good as well. If price of a complement good rises, the demand of the original good falls.
  • Substitutes: The price change in a substitute good has an effect on the quantity demand of the good. A cheaper substitute will drive consumer demand towards the substitute. The demand of the original good here falls. In case of a price rise of a substitute good, the demand of original goods rises.
  • Income of Consumer: Income (Y) of a consumer is positively related with the demand of the good. At higher income, consumer demands more of a good. (There are exceptions that shall be dealt in articles/topics to follow).
  • Taste & Preferences: A positive change in tastes & preferences of the public increases the demand of that good. Tastes and Preferences depend on a lot of factors and keep varying among consumers. Similarly, Consumers opting out of choosing a good due to changing taste/preference for the good would decrease the demand.
  • Expectation about Future Price(s): If a consumer expects the prices in the future to rise, the current demand would drive up. The present demand would decrease if the consumer expects prices to fall in future as he/she would prefer to postpone the purchase of the good. (if it is possible to do so).
  • Size & Composition of Population: A larger size of population is an obvious reason for higher demand. The composition of the population would reflect the choice & types of goods preferred by consumers. For example, majority of the Indian consumption demand is driven by items of daily use of the Youth such as, technological products, electronic gadgets, apparels, fashion accessories, books etc. 
The demand function encapsulates the effect of all of these factors (including the price of the product), to help determine the demand of a particular good. Mathematical representations may vary across academic circles; however, the core idea remains the same.

About me

ramandeep singh

My name is Ramandeep Singh. I authored the Quantitative Aptitude Made Easy book. I have been providing online courses and free study material for RBI Grade B, NABARD Grade A, SEBI Grade A and Specialist Officer exams since 2013.

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