Determinants of Demand ********************* Price of the Commodity: Price, of course, is the prime determinant of demand for a commodity. Higher the price, lower the purchase’ operates like a law in the market. Often this relationship is referred to as the, ‘Law of Purchase’ or ‘Law of Demand’. But there are other determinants of demand as well, as under: Income of the Consumer: Higher the income (implying purchasing power), higher the purchase. Tastes and Preferences: A South Indian buys more rice while a North Indian buys more wheat. Why? Because of the difference in tastes and preferences. Price of the Related Commodity: Demand for a commodity also depends on price of the related commodity. It is called Cross-Price-Effect. Cross Price Effect It refers to effect of a change in price of one commodity on the demand for the other commodity. Example: If price of diesel decreases, it is very likely that the demand for petrol also decreases. Some people may shift from petrol cars to diesel Cars. Implying a fall in demand for petrol when price of diesel has fallen, even when price of petrol continues to be the same Market Expectations: Expectations about the market include (a) behaviour of price in the near future and (b) availability of commodity in the near future. If a curfew is clamped in an area (like in the city of Jammu these days) owing to social unrest, people expect prices of essential goods to increase; also they expect overall shortage of these goods owing to problems of transportation. Consequently, the tendency would be to buy more of essential goods at their existing price. People will like to store these goods for use in the near future. Credit Facility: Credit facility through bank loans and credit cards has emerged to be an important determinant of demand, particularly of consumer durables like Cars, TVs, Televisions, etc. A check on credit (during inflation) tends to lower demand while liberal availability of credit (during deflation) tends to raise it. Population Size: China and Indian are the emerging demand centres for consumer goods. Why? Simply because of their population size. Demand expands when population expands. However, ‘population size’ as a determinant of demand, is to be considered only in the context of market demand. This, determinant of demand is Not Valid in the context of individual demand. Size and Distribution of Income: This is yet another determinant of market demand only. When national income of a country increases, market demand tends to rise and vice versa. Likewise, ‘if distribution of income is skewed’ (or unequal) and a large number of people in the country are below poverty line, market demand for luxury goods (big cars or LCD TVs) is likely to be low. However, the students are advised not to consider this determinant in the context of individual demand.
Posted on: Thu, 01 Aug 2013 18:37:39 +0000
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