Determinants of Demand

Determinants of demand are factors that cause the demand curve to shift. Changes in the demand will make the demand curve shift either positively or negatively.

Understanding the factors that affect demand and the correlation is essential as it helps you to make the right decision when purchasing an item or service.

There are a total of 6 determinants of demand, including:

  1. ​Changes in the price of the product or service
  2. Changes in the consumer income
  3. Changes in the taste and preference of the consumers
  4. Changes in the price of related products
  5. Changes in the expectations of the consumers
  6. Effects of marketing campaigns

We will have a look at each of these determinants in the following sections.

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1. Price of the Product or Service

The price of a service or a product affects the demand for the product largely.

When the price of a commodity increases the demand for the product or service goes down and vice versa.

When you understand the price-demand relationship, you will know that it makes a great contribution in an oligopolistic market.

The success of a company depends on the price wars between rival firms.


2. Consumer Income

This is one of the most important demand determinants.

The income of the consumer will determine the type of goods and services the client will purchase.

Purchasing power dictates what the client can afford to buy or not.

When your income increases, you are in a position to buy more goods and services and when your income decreases you have less purchasing power, therefore, will not buy many commodities or services.

The increase in the income-demand relationship can be explained by four categories of goods, which include essential consumer goods, normal goods, luxury goods, and inferior goods.


3. Taste and Preference of the Consumers

The taste and preference of the consumer play a crucial role in determining what the client will buy from a certain market.

In some cases, you will try new products or services in the market and get rid of the old ones.

Advanced goods and services offer a better taste and preference to the customer, unlike the old ones.

In addition to this, your habits also influence demand because for females an increase in the production of makeup kits increases demand.


4. Price of Related Products

Before you buy anything in the market, you will always compare prices and the features of the product or service.

The goods can be classified as substitutes or complementary goods.

Substitutes refer to goods what will satisfy same need. In this context, if you are looking for detergent or washing products, you can buy a product of your choice with a lower price.

Complementary goods are goods that are consumed together.

For example, if you buy a new car, you will increase the demand for petrol because you will require the product.


5. Expectations of the Consumers

The future expectations of the customers play a vital role in determining the rate of demand for a particular product.

When the price of the product will increase in the near future, you will be prompted to buy large quantities of the product to avoid extra costs.

When the price of the product will drop, you might as well wait for it to drop before you can buy.


6. Effects of Marketing Campaigns

Effective advertisements ran on various media platforms can sway the demand of a product or service.

For example, when you see an exceptional advert you can be convinced to try the product and in this context create demand for the same.

In summary, demand is affected by various factors. Depending on the location, purchasing power, income, taste and preference, and your expectations, you will increase or reduce demand for a certain product or service.

Hung Nguyen
 

Entrepreneur, independent investor, instructor and a visionary of my team here. I've been playing with stocks and sharing my knowledge to the world. The stock market is cool, and I love it!

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