Explain in detail the determinants of demand.
Answers
Answer:
Demand drives economic growth. Businesses want to increase demand so they can improve profits. Governments and central banks boost demand to end recessions. They slow it during the expansion phase of the business cycle to combat inflation. If you offer any paid services, then you are trying to raise demand for them.
So what drives demand? In the real world, a potentially infinite number of factors impact each consumer's decision to buy something. In economics, however, the equation is simplified to highlight the five primary determinants of individual demand and a sixth for aggregate demand.1
The Five Determinants of Demand
The five determinants of demand are:
The price of the good or service.
The income of buyers.
The prices of related goods or services—either complementary and purchased along with a particular item, or substitutes and bought instead of a product.
The tastes or preferences of consumers will drive demand.
Consumer expectations. Most often, this refers to whether a consumer believes prices for the product will rise or fall in the future.
For aggregate demand, the number of buyers in the market is the sixth determinant.
Demand Equation or Function
This equation expresses the relationship between demand and its five determinants:1
qD = f (price, income, prices of related goods, tastes, expectations)
As you can see, this isn't a straightforward equation like 2 + 2 = 4. It isn't that simple to create an equation that accurately predicts the exact quantity that consumers will demand.
Instead, this equation highlights the relationship between demand and its key factors. The quantity demanded (qD) is a function of five factors—price, buyer income, the price of related goods, consumer tastes, and any consumer expectations of future supply and price. As these factors change, so too does the quantity demanded.
How Each Determinant Affects Demand
Each factor's impact on demand is unique. When the income of the buyer increases, for example, that could also increase demand. The buyer has more money and is more likely to spend it. But when other factors increase—like the price of related goods, for example—demand could decrease.