NAME: UMAIR ALI

ROLL NO: 20104009-003

SUBJECT: ECONOMICS
DEPARTMENT: BS-Math
SEMESTER: 4th
SUBMITTED TO: MA’AM MUZAAMIL RAFIQUE
Determinants of Demand
Determinants of Demand are the factors that influence the decision of
consumers to purchase a product or service.
It is essential for organizations to understand the relationship between the
demand and its each determinant to analyze and estimate the individual and
market demand for a commodity or service.

The quantity demanded for a commodity or service is influenced by various

factors, such as price, consumer’s income and preferences, and growth of
population.

For example
The demand for apparel changes with changes in fashion and tastes and
preferences of consumers.
This can be expressed as follows:

DA = f (PA , PO ,………, I , T )
Where,

PA = Demand for commodity A

f = Function
PO = Price of other related products
I = Income of consumers
T = Tastes and preferences of consumers

Demand in Economics
Demand is an economic principle can
be defined as the quantity of a product that a consumer desires to purchase
goods and services at a specific price and time.
Determinants of Demand
In Economics, there are ten determinants of
demand for individual and market. The Determinants of Demand are as follows:
 Price of a commodity
 Price of related goods
 Income of consumers
 Tastes and preferences of consumers
 Consumers expectations
 Credit policy
 Size and composition of the population
 Income distribution
 Climatic factors
 Government policy

Determinants of Individual Demand

 Price of Commodity
 Price of Related Goods
 Income of Consumers
 Tastes and Preferences of Consumers
 Consumers Expectations
 Credit Policy

Determinants of Market Demand

 Size and composition of Population
 Income Distribution
 Climatic Factors
 Government Policy
Factors Influencing Individual Demand
When an individual intends to purchase a particular product, he/she may take
into consideration various factors, such as the price of the product, the price of
substitutes, level of income, tastes and preferences, and the features of the
product.
These considerations determine the individual demand of the product. Let us
now discuss the factors that influence individual demand as follows:

1. Price of a Commodity
The price of a commodity or service is generally inversely proportional to the
quantity demanded while other factors are constant. As per the Law of
Demand, it implies that when the price of the commodity or service rises, its
demand falls and vice versa.

2. Price of Related Goods

The demand for a good or service not only depends on its own price but also on
the price of related goods. Two items are said to be related to each other if the
change in price of one item affects the demand for the other item. Related goods
can be categorized as follow

 Substitute or competitive goods: These goods can be used

interchangeably as they serve the same purpose; thus, are the competitors of
each other.

For example, tea and coffee, cold drink and juice, etc. The demand for a
good or service is directly proportional to the price of its substitute.

 Complementary goods: Complementary goods are used jointly;

For example, car and petrol.

There is an inverse relationship between the demand and price

of complementary goods. This implies that an increase in the price of one
good will result in fall in the demand of the other good.

For example, an increase in the price of mobile phones not only would lead
to fall in the quantity demanded but also lower the demand for mobile cover
or scratch guards.
 3. Income of Consumers
The level of income of individuals determines their
purchasing power. Generally, income and demand are directly proportional to
each other. This implies that rise in the consumer’s income results in rise in the
demand for a commodity.
However, the relationship depends on the type of commodities, which are listed
below:

Let us discuss different types of commodities in detail.

 Normal goods: These are goods whose demand rises with an increase in the
level of income of consumers.

For example, the demand for clothes, furniture, cars, mobiles, etc. rises with
an increase in individual’s income.

 Inferior goods: These are goods whose demand falls with an increase in
consumer’s income.

For example, the demand for cheaper grains, such as maize and barley, falls
when individual’s income increases as they prefer to purchase higher quality
grains.

 Inexpensive goods or necessities of life: These are basic necessities in an

individual’s life, such as salt, matchbox, soap, and detergent. The demand for
inexpensive goods rises with an increase in consumers’ income until a certain
level after that it becomes constant.

4. Tastes and Preferences of Consumers

The demand for commodity changes with changes in the tastes and preferences
of consumers (which depend on customers’ customs, traditions, beliefs, habits,
and lifestyles).

For example, the demand for burqas is high in gulf countries. In such countries,
there may be less or no demand for short skirts.
 5. Consumers Expectations
Demand for commodities also depends on the consumer’s expectations
regarding the future price of a commodity, availability of the commodity,
changes in income, etc. Such expectations usually cause rise in demand for a
product.

For example,
If a consumer expects a rise in the price of a commodity in the
future, he/she may purchase larger quantities of the commodity in order to stock
it. Similarly, if a consumer expects a rise in his/her income, he/she may
purchase a commodity that was relatively unaffordable earlier.

6. Credit Policy
It refers to terms and conditions for supplying various commodities on credit.
The credit policy of suppliers or banks also affects the demand for a
commodity. This is because favorable credit policies generally result in the
purchase of commodities that consumers may not have purchased otherwise.

Favorable credit policies generally increase the demand for expensive durable
goods such as cars and houses.

For example,
Easy home and car loans offered by banks have led to a steep rise
in the demand for homes and cars respectively.

Factors Influencing Market Demand

Market demand is the sum total of all household (individual) demands. Therefore,
all the factors that affect individual demand also affect market demand as well.
However, there are certain other factors that affect market demand, which is as
follows:
 7. Size and Composition of the Population
Population size refers to the actual number of individuals in a population. An
increase in the size of a population increases the demand for commodities as the
number of consumers would increase.

Population composition refers to the structure of the population based on

characteristics, such as age, sex, and race. The composition of a population
affects the demand for commodities as different individuals would have
different demands.

For example, a population with more youngsters will have higher demand for
commodities like t-shirts, jeans, guitars, bikes, etc. compared to the population
with more elderly people.

8. Income Distribution

Income distribution shows how the national income is divided among groups of
individuals, households, social classes, or factors of production. Unequal
distribution of income results in differences in the income status of different
individuals in a nation.

For example, luxury goods will have higher demand. On the other hand,
nations having evenly distributed income would have higher demand for
essential goods.

9. Climatic Factors

The demand for commodities depends on the climatic conditions of a region

such as cold, hot, humid, and dry.

For example, the demand for air coolers and air conditioners is higher during
summer while the demand for umbrellas tends to rise during monsoon.
 10. Government Policy
This includes the actions taken by the government to determine the fiscal policy
and monetary policy such as taxation levels, budgets, money supply, and
interest rates. Government policies have direct impact on the demand for
various commodities.

For example, if the government imposes high taxes (sales tax, VAT, etc.) on
commodities, their prices would increase, which would lead to a fall in their
demand.

On the contrary, if the government invests in building of roads, bridges, schools,

and hospitals, the demand for bricks, cement, labor etc., would rise.