Determinants of Demand

Determinants of demand are the factors that affect the demand of a product. Demand for any commodity can be considered from two points of view:

  • Individual factors affecting demand
  • Market factors affecting demand.

a) Individual Factors Affecting Demand

Individual demand is the amount of goods or services that the individual is willing and able to buy at a given price and over a given period of time. Factors affecting individual demand are:

1) The price of the product

When deciding whether or not to buy a particular product, an individual will compare the price of the product and the amount of utility or satisfaction expected to be received from the product. If the price is considered worth the anticipated utility the individual will buy the product and if not will not buy. A decrease in the price of a product will probably increase individual’s demand for it since the amount of utility obtained is likely to be worth the lower price. Conversely a rise in the price of a product will probably result in a fall in demand, as the amount of utility received is less likely to be worth the higher price to be paid. An example of this phenomenon is the hotel industry in Kenya. There is usually an increase in domestic tourism during the low season when many Kenyans consider the lower hotel prices to be worth the level of satisfaction they are receiving. During the high season when the hotel prices are high, many do not consider the satisfaction they are receiving to be worth. If the amount a consumer is willing and able to purchase due to change in the price, a change in the quantity demanded is said to take place. If on the other hand the amount the consumer is willing and able to purchase changes because of a change in the price of a given commodity leads to a change in the quantity demanded will be undertaken later in utility analysis and indifference curve analysis

2) The prices of related goods

The demand for all goods is interrelated in that they are competing for consumer’s limited income. Two peculiar interrelationships can be:

Substitutes

Goods such as tea and coffee butter and margarine, beef and mutton, a bus ride and a matatu ride, a mango and an orange, CDs and cassettes. Two goods, X and Y are said to be substitutes if arise in the price of one commodity, say Y, leads to a rise in the demand of the other commodity X. If the price of tea increases consumers will find coffee relatively cheaper to tea as; a result, the demand for coffee increases. Substitutes are commodities that can be used in place of other goods. This phenomenon is illustrated in Figure 2.3. The graph shows the relationship between the prices of tea over the quantity for coffee. If the price of tea increases from P1 to P2 the quantity demanded of coffee rises from Q1 to Q2.

Complements

Complement goods such as shoe and polish, pen and ink cars and petrol, computers and software, bread and margarine, hamburgers and chips, tapes and tape recorders. Demand for some commodities can also be affected by changes in the prices of the complementary if a rise in the price of one of the goods, say A leads to the fall in the demand of another food, say B. Complimentary goods are usually jointly demanded in the sense that the use of one requires or is enhanced by the use of the other. Figure 2.4 illustrates the relationship between complementary goods graphically. For example if the price of cars is lowered demand for petrol increases because more cars will be bought/demanded. The curve shows the relationship between the price of a car and quantity demanded for petrol. If the price of cars falls from P2 to P1 the quantity demanded for petrol increases from Q1 to Q2

Demand Curve for Complementary Goods

Figure 2.4 Demand Curve for Complementary Goods

3) Disposable Income

An individual’s level of income has an important effect on the level of demand for most products. If income increases demand for the better-quality goods and services increases. This relationship however, depends on the type of goods and level of consumers‟ income. The three types of are goods are:

  • Normal goods: these are goods whose demand increases as income increases. The demand for normal goods increases continuously with increase in income. It tends to become gently as people reach the desired level of satisfaction.
  • Inferior goods: They refer to goods for consumers with low income levels such that as income increases its demand falls. At low level of income, these individuals will tend to consume large amount of these goods but as income increases they buy other goods which they consider superior thus demanding less of the inferior goods. At very low level of income an inferior good behaves like a normal good only to behave inferior as income increases
  • Necessities: these are goods which consumers cannot do without such as salt, match boxes among others. Their income demand curve tends to remain constant other than at the lowest levels of income as indicated in Figure 2.5.

Demand Curve for a Necessity

4) Consumer tastes, preferences and fashion

Personal tastes play an important role in governing the consumer’s demand for certain goods. For example, preferring to consume imported commodities despite them being extremely expensive. Prevailing fashions are an important determinant of tastes. The demand for clothing for example, particularly is susceptible to changes in fashion.

5) Level of advertising

The level of advertising is also an important determinant of demand. In highly competitive markets, a successful advertising campaign will increase the demand of a particular product while at the same time decreasing the demand for competing products. Increase in advertising will increase demand in the following ways:

  • It helps inform about the product of a firm
  • Can introduce new products to the market.
  • Induce individuals to frequently use the product/service

The factors affecting advertising policies include:

  • Cost of advertising
  • Mode of advertising
  • Impact of advertising on the demand of the product
  • The target group (old, young)
  • The number of competitors and quality of their products
  • The market share of the fi rm and the degree of competition
  • Future expectations in price changes
  • Government policies and taxes
  • Appropriate time to make advertisements
  • Cultural background
  • Languag3

6) The availability of credit consumers

This factor especially affects the demand for durable consumer goods which are often purchased on credit. For example a decrease unavailability of credit or the introduction of more stringent credit terms is likely to lead to a reduction in the demand of some durable consumer goods.

7) Government policy

The government may influence the demand of a given commodity through legislation. For example making it mandatory for everyone to wear seatbelts. The consumers inevitably get to purchase more seatbelts as a result. Subsidies and taxation policies affect prices in opposite directions. When the government grants subsidies prices of goods falls leading to increase in demand and vice versa. On the other hand, taxation increases the price of the product, leading to reduced demand. Price controls and legislations are also government methodologies that will affect demand

8) Weather conditions and climate change

The demand for various goods varies depending on weather. For instance there is high demand for woolen clothes during rainy reasons.

b) Market Factors Affecting Demand

Aggregate or market demand refers to the horizontal demand sum of the demands for individual consumers. It refers to quantity demanded in the market at each price by individual consumers. For this reason all the factors affecting individual demand will affect market demand. The market demand for a commodity can be derived graphically as in Figure 2.6.

Derivation of Market Demand

Where P1, P2 and P3 are individual prices Q1, Q2 and Q3 are individual quantities demanded. Pmkt is the market price Qmkt is market quantity demanded. Other factors affecting market demand include:

  • Change in population: market demand is influenced by the size of the population, the composition of the population in terms of age, sex as well as geographical distributions.
  • Distribution of income more even distribution of income may increase demand for normal goods while at the same time it may lower the demand for luxuries.

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