Major Factors That Affect Demand with Examples
The meaning of demand and the factors affecting demand are core concepts in economics, especially for Commerce students in Classes 11 and 12. Knowing how demand works is vital for school and competitive exams, as well as for understanding real-life business decisions and consumer behavior. Mastering this topic makes studying concepts like the law of demand and related market strategies much easier.
| Type of Demand | Definition | Example |
|---|---|---|
| Individual Demand | Demand by a single consumer for a product | 1 friend buying ice cream |
| Market Demand | Combined demand by all consumers for a product | Total students buying notebooks in a school |
| Price Demand | Quantity demanded at a particular price | 10 pens at ₹5 each |
| Income Demand | Quantity demanded at a given consumer income | Demand for smartphones as income rises |
| Cross Demand | Demand influenced by prices of related goods | Tea demand rises if coffee price increases |
| Derived Demand | Demand for a good due to its use in producing another | Demand for steel depends on demand for cars |
Meaning of Demand
The meaning of demand in economics is the quantity of a good or service that consumers are willing and able to buy at different prices during a specific period. Demand reflects both the desire and the ability to pay for a product. For example, if you want a smartphone and can afford it, your wish becomes demand.
Difference Between Demand, Wants, and Quantity Demanded
It is important to distinguish "demand" from "wants" and "quantity demanded". Wants are unlimited desires. In contrast, demand is a want backed by willingness and ability to pay. "Quantity demanded" means the specific number of units purchased at a given price.
Factors Affecting Demand
There are several core factors affecting demand, also known as determinants of demand. Understanding these makes it easier to answer exam questions and analyze business markets. Here is a list of major factors:
- Price of the Good: When the price of a good falls, demand usually rises. When the price rises, demand usually falls. This is called the Law of Demand.
- Income of Consumers: If consumer income increases, demand for normal goods rises. If income falls, demand may drop. For inferior goods, demand decreases as income rises.
- Tastes and Preferences: Fashions, advertisements, and changes in preferences can shift demand up or down for various products.
- Prices of Related Goods: Substitute goods (e.g., tea and coffee): When the price of tea rises, demand for coffee increases. Complementary goods (e.g., car and petrol): If petrol prices rise, demand for cars may fall.
- Consumer Expectations: If people expect prices to rise soon, they may buy more now, increasing current demand.
- Population and Market Size: A larger population or market area increases overall demand for products.
- Government Policy and Other Factors: Taxes, subsidies, and government regulations can boost or reduce demand for products.
Types of Goods Based on Income and Price Effect
Goods can be categorized based on how demand responds to income and price changes:
- Normal Goods: Demand rises as income rises (e.g., branded rice).
- Inferior Goods: Demand falls as income rises (e.g., coarse grains).
- Substitute Goods: Goods used in place of each other (e.g., butter and margarine).
- Complementary Goods: Goods used together (e.g., ink and pen).
- Giffen and Veblen Goods: Rare exceptions where demand rises with price due to uniqueness.
Graphical Representation and Demand Schedule
The relationship between price and quantity demanded can be shown using a demand schedule (table) and a demand curve (graph). The curve usually slopes downwards, showing an inverse relation between price and demand. To practice, see the Demand Schedule page.
Practical Application: Real-life Example
Suppose the price of cold drinks drops in summer. Both your willingness and ability to buy increases, so demand rises. Similarly, if your pocket money increases, you may buy more snacks (income effect).
Further Understanding and Related Concepts
To learn more about the law of demand, refer to the Law of Demand and Market Demand pages. Understanding elasticity of demand is also useful for exams and business analysis: Elasticity of Demand.
At Vedantu, we simplify Commerce topics to support exam preparation and everyday understanding. Mastering the meaning of demand and the factors affecting demand builds a strong foundation for economics, improves business awareness, and helps in scoring better in exams. Use tables, examples, and internal links to revise faster and more effectively.
In summary, understanding the meaning of demand and its determinants allows students to analyze markets, prepare for exams, and apply concepts in daily situations. Key factors like price, income, tastes, and related goods drive changes in demand. A strong grasp of these basics leads to success in Commerce subjects and everyday economic decisions.
FAQs on Meaning of Demand and Factors Affecting Demand in Economics
1. What is meant by 'demand' in economics, and what two conditions are essential for it to exist?
In economics, demand is the quantity of a good or service that a consumer is both willing and able to purchase at various prices during a specific period. For a desire to become demand, two essential conditions must be met: 1) the willingness to buy (the desire for the item) and 2) the ability to pay (having sufficient purchasing power or money).
2. How does 'demand' differ from 'quantity demanded'?
The key difference lies in what they represent. Demand refers to the entire relationship between the price of a good and the quantities people would buy at each price, often shown as a demand curve. In contrast, quantity demanded is the specific amount of a good that consumers are willing to buy at one particular price. A change in the good's own price causes a change in quantity demanded, while a change in other factors (like income) causes a change in overall demand.
3. What are the main factors that affect the demand for a commodity?
The main factors, also known as determinants of demand, include:
- Price of the Commodity: The most direct factor; demand typically falls as price rises.
- Income of the Consumer: Higher income usually increases demand for normal goods but decreases it for inferior goods.
- Prices of Related Goods: Includes substitutes (e.g., tea and coffee) and complements (e.g., car and petrol).
- Tastes and Preferences: Changes in fashion, habits, and advertising can shift demand.
- Consumer Expectations: Beliefs about future price changes or income can influence current buying decisions.
- Population and Market Size: A larger population generally leads to higher market demand.
4. How do the prices of related goods, like substitutes and complements, influence demand? Please provide an example for each.
The prices of related goods have a significant impact on demand. For substitute goods (those used in place of another), an increase in the price of one leads to an increase in demand for the other. For example, if the price of coffee rises, the demand for tea is likely to increase. For complementary goods (those used together), an increase in the price of one leads to a decrease in demand for the other. For example, if the price of petrol rises sharply, the demand for cars may fall.
5. Beyond academics, why is understanding the factors affecting demand crucial for a real-world business?
For a business, understanding the factors affecting demand is vital for survival and growth. It helps in making critical decisions such as price setting (how much to charge to maximise revenue), production planning (how much to produce based on anticipated demand), inventory management, and crafting effective marketing strategies. By analysing these factors, a company can better predict market changes and adapt its operations to meet consumer needs profitably.
6. How does a 'shift in the demand curve' differ from a 'movement along the demand curve'?
A movement along the demand curve is caused exclusively by a change in the good's own price, resulting in a change in quantity demanded (e.g., moving to a different point on the same curve). In contrast, a shift in the demand curve (either to the right for an increase or to the left for a decrease) is caused by a change in any non-price factor affecting demand, such as a change in consumer income, tastes, or the price of a related good. It signifies a change in overall demand at every price level.
7. Can demand for a good ever increase when its price rises? Explain this exception to the Law of Demand.
Yes, in rare cases, demand can rise with price, which contradicts the general Law of Demand. This occurs with two types of goods: Giffen goods and Veblen goods. Giffen goods are highly inferior goods where the income effect of a price rise outweighs the substitution effect, forcing poor consumers to buy more of it. Veblen goods are luxury items (e.g., designer watches) where a higher price enhances their prestige, making them more desirable to wealthy consumers.
8. How does a consumer's income level affect their demand for 'normal goods' versus 'inferior goods'?
A consumer's income has opposite effects on these two types of goods. For normal goods (e.g., branded clothes, premium groceries), demand increases as the consumer's income rises. There is a positive relationship between income and demand. For inferior goods (e.g., coarse grains, public transport), demand decreases as the consumer's income rises because people switch to better quality substitutes. Here, the relationship between income and demand is inverse.
