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The concept ‘demand’ refers to the quantity of a good or service that consumers are willing and able to purchase at various prices during a period of time.
Effective demand for a thing depends on
(ii) means to purchase and
(iii) willingness to use those means for that purchase
1.1.1 Determinants of demand (What factors affect demand)
1) Price of the commodity: Ceteris paribus i.e. other things being equal, the demand of a commodity is inversely related to its price.
Price of related commodities: Related commodities are of two types:
|Complementary goods are those goods which are consumed together or simultaneously. For example, tea and sugar, automobiles and petrol, pen and ink are used together.||Competing goods or substitutes are those goods which can be used with ease in place of one another. For example, tea and coffee, ink pen and ball pen, are substitutes for each other and can be used in place of, one another easily.|
|When commodities are complements, a fall in the price of one (other things being equal) will cause the demand of the other to rise.||When goods are substitutes, a fall in the price of one (ceteris paribus) leads to a fall in the quantity demanded of its substitutes.|
- Burger and Subway are competing goods
- Burger and cold drink are complementary goods
2) Level of income of the household: Other things being equal, the demand for a commodity depends upon the money income of the household.
3) Tastes and preferences of consumers: The demand for a commodity also depends upon tastes and preferences of consumers and changes in them over a period of time.
‘Demonstration effect’ plays an important role in affecting the demand for a product. An individual’s demand for colour television may be affected by his seeing one in neighbour’s or friend’s house, either because he likes what he sees or because he figures out that if his neighbour or friend can afford it, he too can.
4) Other factor: Apart from the above factors, the demand for a commodity depends upon the following factors:
- Size of population: Generally, larger the size of population of a country or a region, greater is the demand for commodities in general.
- Composition of population: If there are more old people in a region, the demand for spectacles, walking sticks, etc. will be high. Similarly, if the population consists of more of children, demand for toys, baby foods, toffees, will be more.