The law of supply and demand, often called the law of demand and supply, is a theory that describes how the suppliers of a resource interact with consumers for that resource.
The idea characterizes the link between the price of a specific good or service and the desire to acquire or sell it. People are more likely to offer more when prices rise and want to buy less when prices fall. The combination of these two “laws,” as well as other economic factors like competition in a market place, determines market price and volume.
7 Factors which Determine the Demand for Goods
The seven factors that influence consumer demand are as follows:
- Consumers’ Tastes and Preferences
- People’s Incomes
- Price Changes in Related Goods
- Number of Consumers in the Market
- Propensity to Consume
- Consumers’ Expectations for Future Prices
- Income Distribution
The demand schedule and the law of demand state that when “other things remain equal,” price and quantity demanded are linked. When something changes in these other factors, the entire demand schedule or demand curve is altered. The position and slope of the demand curve are determined by these other factors.
The whole demand schedule or the demand curve will change if these other elements or determinants of demand alter. A demand curve will shift upward or downward as a result of the variation in these variables, depending on whether it is above or below equilibrium.
The following are the factors which determine demand for goods:
Tastes and Preferences of the Consumers
The tastes and preferences of consumers for a product are an important element in determining demand for it. Consumers’ taste and preference levels will influence the demand for a good.
Consumers’ interests and preferences for various items frequently shift, resulting in a shift in demand. The changes in demand for different items are due to fashion trends as well as marketing efforts by manufacturers and merchants of competing products.
When Coca Cola established a factory in New Delhi, demand for it was extremely limited. However, owing to extensive promotion and coverage, people’s taste for Coca Cola has changed and become favorable to it.
As a result, the demand for Coca-Cola has increased dramatically. In economics, a demand curve that has moved upward is referred to as having shifted. When any product becomes out of style or people’s tastes and preferences change, the demand for it decreases. We say that the demand curve for these items will shift downward in economics.
Incomes of the People
The desire for products is also influenced by the purchasing power of consumers. The greater the people’s income, the more demand there will be for items. We take peoples’ income as given and constant when we create a demand schedule or a demand curve for a product.
When incomes rise, total demand shifts up and down depending on whether the entire demand curve moves up or down as a result of this change in incomes. When the income of individuals rises, they have greater purchasing power.
As a result, when people’s earnings rise, they can purchase more. It is because of this that an improvement in income has a beneficial influence on demand for a product. When individuals’ incomes shrink, they will want fewer items and their demand curve will shift to the left.
For example, in India during the planning period, incomes rose dramatically as a result of the significant investment outlays on development projects by the government and business. As a consequence of this rise in demand for food grains, demand for them has shifted to the right.
Similarly, when agricultural output is greatly reduced as a result of drought in a year, farmers’ earnings decline. As a consequence of the decreased demand for cotton cloth and other manufactured things among farmers, their incomes fall.
Changes in the Prices of the Related Goods
The need for a product is also influenced by the costs of comparable items, especially those that are substitutes or complements. When we generate a demand graph or demand curve for a good, we assume that the related goods’ prices will remain constant.
When the prices of related products, substitutes, or complements change, the entire demand curve will shift position; it will rise or fall as necessary. When the cost of a substitute for a good falls, demand for that product decreases, and when the price of a substitute rises, demand for that good increases.
Given the current rate of consumption, coffee traders could lose $4.35 billion over the next decade if prices drop to a level that is below today’s average costs. If coffee costs decrease but people’s wages stay constant, consumers will demand less coffee than they previously had been purchasing. When coffee expenses fall, customers switch from coffee to tea in order to offset them; as a result, tea demand decreases.
When the price of any one good changes, the demand for all goods that are complements to it will be affected. For example, if the cost of milk goes down, so does the demand for sugar. People will consume more milk or make more khoya, burfi, rasgullas with milk as a result of this change. The demand for petrol and automobiles is also complementary. When the price of vehicles falls, people desire them more as a result of which there is an increase in petrol consumption. Cars and petrol are complimentary goods.
The Number of Consumers in the Market
We’ve already seen how the market demand for a product is determined by taking the present and future demands of both existing and potential consumers or buyers of a good, as well as various possible prices. The higher the number of purchasers of a good, the greater its market demand.
The first is whether a consumer’s position in the value chain has an impact on their purchasing behaviour. The second question is, therefore, what influences the number of consumers of a good? If consumers switch one product for another, then the number of customers for the new item will fall while that for the old will rise.
Furthermore, the number of consumers of a product will grow when the seller of a good is successful in discovering new markets for it and as a result market size expands. The increase in population is also an important reason behind the rise in number of consumers. For example, in India, the need for many necessary items, especially food grains, has increased as a result of population growth and the resultant increase in demand.
Changes in Propensity to Consume
Consumers’ desire for them is also impacted by their tendency to buy. If the propensity of consumers to purchase rises, they will spend a greater proportion of their money, resulting in increased demand for goods.
If the propensity to save of individuals rises, that is, if propensity to consume decreases, consumers will spend a smaller amount of money on items, resulting in a demand for goods decrease. It’s also evident that when income remains constant, a change in the population’s propensity to consume will result in a change in demand for products.
Consumers’ Expectations with regard to Future Prices
Consumers’ expectations with regard to future prices of products are another element that affects demand for goods. If consumers anticipate that the price of a product will rise in the near future, they would want more of it now so that they don’t have to pay higher costs in the future. When people anticipate a brighter future in which they will have greater income, they are more likely to spend their present expenditures.
The demand for goods is also determined by the distribution of income in a society. The propensity to consume of the entire society will be greater if income is more evenly distributed, implying higher demand for products. If distribution of income is more unequal, however, the propensity to consume of the entire society will be lower, since rich individuals have a decreased appetite for goods than poor individuals.
As a result of this, demand for consumer goods will be significantly lower. This is the impact of income inequality on consumption and demand for products. However, the shift in income distribution throughout society has different effects on demand for various items. The rich people would pay higher taxes and the money thus collected would be used to create employment for the poor individuals. The distribution of income would become more equal, which implies that absolute purchasing power from the rich to the poor will shift.
As a result of this, the demand for those goods will rise, which are usually bought by the poor because purchasing power has improved and demand for them will fall, which are frequently consumed by rich people on whom progressive taxes have been imposed.