Demand function showing relationship between demand and its various determinants
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Explanation:
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Answer:
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.
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.
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.