[Commerce Class Notes] on Meaning and Determinants of Demand Pdf for Exam

Demand relates to the willingness and potential of consumers to obtain a provided quantity of a good or service in any given point of time or over a duration in time. Also, in economics, the term means that the consumer has the pressing need, promoted by the ability to pay from an income. Income brings about a purchasing power that they practise in the market through effective demand. Economic demand is something that runs the commerce. With no economic demand, companies would no longer be willing to supply products as they wouldn’t be making any profit by entering the market. 

What a buyer pays to purchase a certain good is termed as price. Further, the total number of units purchased at that price is said to be the quantity demanded. The price is usually inversely proportional to the quantity demanded, i.e. when the price of any service or good increases, the quantity demanded deliberately decreases. Similarly, when the price of the good falls, the quantity demanded hikes up. Economists confidently pronounce this inverse relationship between price and quantity demanded as the law of demand. However, external factors govern economic demand; that’s where determinants come into the play.  Since now we know what demand is, let’s discuss the demand analysis meaning types and determinants of demand.

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Types of Determinants of Demand 

Every factor has a unique impact on demand. We need to understand the meaning of determinants and types of demand. The following are the few determinants of demand. 

Price of the Product

Price is used as a parameter by the people to decide if all the other factors remain constant or equal. According to the law of demand, the decrease in the demand follows an increase in the price and an increase in the demand follows a reduction in price. 

The Income of the Consumers

If the income rises, the number of goods demanded by the consumers also increases. Meanwhile, a drop in income leads to lower consumption levels. Thus the relationship between the demand and the income is not direct. However, the effect the income of a consumer has on the demand for a product depends on the type of commodity. With most goods, there is a positive relationship between demand and the income of the buyer. On the other hand, a change in income can have an inverse effect on the demand for a product. In these cases, when the income of the consumer increases, he/she tends to buy a high-quality product and avoid inferior goods. 

Number of Buyers in the Market

The number of consumers plays a vital role in net/total demands. When the number increases, the demand also increases. In some cases, the demand for the product increase with the changes in the population. In other cases, the demand increases as the product become more appealing to the customers. In such scenarios, the population remains the same but more people are buying the same commodity. 

Consumer’s Expectations 

Consumer expectation is one of the major factors that affect the demand for a commodity. That is why a business has to focus on both habits and expectations of its target audience, which makes it much harder to predict the demand for your product. Sometimes, consumers might wait before buying a product as they are expecting what might happen in the future. For instance, a person might not buy a mobile phone because they are waiting for a new model.

Tastes and Preferences of The Consumers 

Consumers can be picky about the product they want. When they are shopping for a product, it depends on their tastes and preferences as to what brand or model they will choose. These tastes and preferences of a consumer can change due to a number of reasons, both internal and externals. These factors include age, location, marital status, and much more. Even though taste and preference are intangible, they can have a huge impact on the demand for any given commodity. For instance, a consumer is more likely to buy a product when they see a certain celebrity endorsing it. However, if the consumer finds out there are some bad side effects of a product, the demand for that commodity will decrease drastically. 

Complement Goods 

Complement goods are the ones that go with each other. Let’s take care and petrol, for example. If there is an increase in the price of petrol, the demand for petrol will decrease and so will the demand for a car. So, two goods that complement each other will have an inverse relationship between the price of one commodity and the demand for the other. 

Substitute Product

In this case, when the price of one product increases, the demand for another product rises. No matter what you are selling, you will always face competition in the market. That is why you have to pay attention to what your competitors are selling as they can take a large chunk of your market share. So, to determine the demand for your product, you have to focus on the availability of substitute goods in the market. Consider the following factors:

  • The price gap between your and your competitors’ products. 

  • How many items of the same product line does the competitor deal in?

  • The similarity between your product and the one sold by the competitor.  

Now that we understand the meaning of demand and its determinants, let’s discuss the types of demand. 

Types of Demand

We have already discussed what demand is. Now let’s read about the types of demand. Corporations often put a large sum of their budget into comprehending the consumer’s demand for their products. This facilitates them to drag their products to customers without losing any capital in any undesirable factors such as overproduction. Inferring what kind of demand your firm falls under is a fair business practice. Therefore let’s take a glance at different types of economic demands. 

Individual and Market Demand 

Market demand is also known as aggregate demand. It refers to the total economic demand in view of all the individual demand in any particular market. Individual demand is a demand for a product by an individual at a certain price. Customer tastes, distinguished quality and brand commitment or loyalty affect individual demand.

Short-term and Long-term Demand 

As the name implies, short-term demand is limited for a brief duration of time; it reflects trends, necessity and modifications in the price more dramatically than the long-term demand. For example, winter wear is worn only during winter, making the demand much shorter when compared to clothing worn all over the year. On the other hand, long-term demands pertain for a longer period of time and this demand doesn’t change with respect to time and price. 

Company and Industry Demand 

The demand for products at a specific price over a span of time from a sole element is known as company demand. Industry demand includes the total aggregate demand for an industry’s products. Company demand is often written in terms of the percentage of industry demand. For example, the demand for Coca-Cola is the company demand, and it makes up the percentage of total industry demand. 

Did You Know?

This Covid-19 pandemic has led to phenomenal catastrophes distinguished by immense job losses on a global scale. In the US, more than 20.5 million people lost their jobs just a few months ago. It has precisely resulted in vast economic distress, leading to excessive layoffs that have influenced a great impact on people of all races, backgrounds and classes. Therefore, the US condoned a staggering and record-breaking 14.7% rate of unemployment.

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