5 key Determinants of Demand With Examples

If you have been reading the financial world, you must have come across the concept of demand and supply. This article talks about what determines the demand and based on which, there is supply. Read to know more.

Determinants of Demand

If you own a business then the secret of your success will depend on the demand for the products that you are making available. The more the demand the more a business will work and progress. The factors that affect the demand for a product are known as the determinants of demand. Knowing and understanding these determinants helps us to understand how well a product might work and supplying what kind of product or service would bring us the most profit.

What are the Determinants of Demand?

Although there are several factors that affect the demands of a product and can be considered as determinants of demand, here are the five main ones:

1. Price of the Product

The price of a product is one of the biggest determinants of demand. The lower the price goes the more the demand grows. Or we can say that if the quality of the products is the same then the customers tend to choose the product with lower price.

2. Preferences of the Customer

The demand for a product also depends on the preferences and tastes of a customer. The more the product can reach the emotional, psychological, or taste-related aspect of the public, the more it can sell. The demand is directly dependent on this factor thus it’s usually kept in mind during the publicity and advertisements of the product.

3. Income of the Customer

The income of the customer affects how they buy products and thus is a determinant of demand. The more the income the more might be the demand but it’s not always true as the marginal utility is also a factor. If the marginal utility (that means the requirement of the product again after its use) drops to zero then the income will no longer remain one of the determinants of demand.

4. Prices of Related Goods

If other products are present in the market that are similar to yours then the price of these goods will also affect the demand for your product. If the complementary goods have higher prices, then your products would have a higher demand than them and the opposite happens if the complementary goods have lower prices, i.e., your goods will have lesser demand.

5. Customer Expectation

The perception and view of a customer expecting an increase or a decrease in the price of a product also affect the quantity of the product that sells. If the customers expect the prices to rise in the future the demand rises as they want to buy it before such a situation arises. Similarly, when the public expects the prices of goods to reduce in the future, the demand for the product reduces.

Also Check: Types of Inflation: 3 Most Critical 5 More

Frequently Asked Questions

Does the number of buyers in the market affect the demand for a product?

Yes, the more people to buy a particular product, the more will be demand for that very product.

What is Marginal Utility?

Marginal utility is the need for a particular product. The limit to which it might be needed after which the income and the other factors don’t affect the demand of that product.

What is “Ceteris Paribus”?

When analyzing and making decisions on whether a factor affects the demand or not and if it does then how much is the impact then all the other determinants are assumed to be unchanging or constant. Although it’s not true in real life, all factors keep changing, but assuming them constant makes understanding it easy. This is known as “ceteris paribus”.

What is the Demand Equation?

The demand equation is a statement that expresses or shows how the various factors or determinants affect the demand.

It is represented as,

QD = f (price, income, prices of related goods, tastes, expectations)

where, QD = quantity demanded; f = factors

Does the composition of the population also affect the demand for products?

Yes, the demand for a product can also be affected by the composition of a certain population. For example, a population with more children will have more demand for children’s goods, and a population with more elders will have more demand for goods for the elderly.