Determinants of Demand

Determinants of demand refer to the factors that affect the demand for a commodity. An individual’s demand for
a commodity is determined by a number of factors. Some of these important factors are as follows:
1) Price of the commodity: The price of a commodity is the most important factor which affects the demand
for a commodity. Other things remaining the same, if price increases, quantity demanded decreases, and if
price decreases, quantity demanded increases.
2) Income of the consumer: Income of the consumer is also an important factor affecting the demand for a
commodity. Generally, when income increases, demand also increases, and when income decreases, demand
also decreases. This is true in the case of normal goods. However, in the case of inferior goods, with an
increase in income their demand decreases and vice-versa.
3) Price of related goods: Changes in the prices of related goods also affect the demand for a commodity.
Related goods may be of two types: Substitute and complementary.
Substitute goods are those goods which can be used in place of each other to satisfy a given want. That is
why they are also called competitive goods. Coffee and tea, pens and pencils, butter and oil, etc., are examples
of substitute goods. If price of tea increases, then demand for coffee will also increase and vice versa. Thus,
rise in price of one commodity lead to increase in demand for its substitute.
Complementary goods are those goods which are used together to satisfy a given want. These goods are
jointly demanded to fulfill a single want. If two goods are complementary goods, a decline in the price of one
would directly change the demand for other commodity and vice-versa. For example, cars and petrol are
complements of each other. If the price of car increases, its demand will decrease and thus will lead to a
decrease in the demand for petrol and vice-versa.
4) Tastes and Preferences: The amount demanded of a commodity depends on consumer tastes and preferences.
When there is a change in taste, habits or preferences of the consumer, his demand will change. If a consumer
is accustomed to certain commodities, he will demand that commodity and this leads to increase in the demand
for that commodity.
5) Population: The market demand for a commodity substantially changes when there is change in the total
population. An increase in population generally increases the demand for goods and services, while a decrease
in population leads to decrease in demand.
6) Advertisement: Attractive advertisements are likely to increase the demand for the goods. People can take
information about various goods from advertisement and they demand those goods.
7) Expectation of future price: If there is an expectation of increase in the price of a commodity in the near
future, consumers will start demanding more of it. Contrary to that, if the price of that commodity is likely to
fall in near future, consumers will start demanding less of that commodity.
8) Seasons, climate and festivals: Demand for goods and services also depends upon seasons, climate and
festivals. For example, during the winter, demand for woolen clothes increases. Similarly, during Dashain
and Tihar, demand for clothes and meat increases.

Kinds (Types) of Demand

1. Price Demand
Price demand refers to the various quantities of a commodity that a consumer would purchase at a given time in
the market at various prices. It shows the relationship between price and quantity demanded of a commodity.
Thus,
Dx = f (Px)
Where,
Dx = Demand for X-good
Px = Price for X-good
Other things remain the same, there would be higher demand at lower price and lower demand at higher price.
Thus, there is inverse relationship between price and quantity demanded.
Y
D
Price

P2
P1
D

0 X1 X2 X
Quantity demanded
The above demand curve clearly indicates the inverse relationship between price of a commodity and its quantity
demand. When price is OP1, quantity demand is OX2. When price rises to OP2 quantity demands falls to OX1.
The fall in quantity demand (X2X1) is due to rise in price (P1P2).

2. Income Demand: Income demand refers to the various quantities of a commodity that consumer would
purchase at a given time in a market at various levels of income. All the other things remain the same, income
demand shows the relationship between income and demand for a commodity, i.e.
DX = f(Y)
Where, DX = Demand for X-good and
Y = Income of the consumer.
Generally, the demand for a commodity changes in the same direction as change in income. However, an increase
in income does not always lead to an increase in the demand for all the commodities. Thus, it is the nature of the
commodity on which its demand depends. On the basis of nature, goods can be classified into two types:
 Normal Goods (Superior Goods),
 Inferior Goods.
a) Normal goods: Normal goods refer to those goods whose income effect is positive. It indicates the positive
relationship between income and quantity demand for the normal goods. It means quantity demanded goes
up with the increase in income and goes down with decrease in income. If X is a normal good, then,
Y↑ →DX↑ and
Y↓ →DX↓
Y

D
Y2
Income

Y1

D
0 X1 X2 X
Quantity demanded
The above demand curve shows increase in quantity demand due to increase in income, keeping other factors
unchanged, for normal good. Quantity demanded for the normal good increases from X 1 to X2 due to increase
in income of a consumer from Y1 to Y2.
b) Inferior goods: Inferior goods refer to those goods whose income effect is negative. It indicates the negative
or inverse relationship between income and demand for an inferior good. When income of the consumer
increases demand for inferior good decreases and vice versa. If X is an inferior good, then
Y↑ → DX↓ and
Y↓ → DX↑ Y
D
Income

Y2

Y1

X1 0 X2 X
Quantity demanded
The above graph shows the effect of increase in income on quantity demand of inferior goods, assuming other
factors unchanged. Consumption of the inferior good decreases from X2 to X1 due to increase in income of a
consumer from Y1 to Y2.
3. Cross Demand: The various quantities of a commodity that consumer would purchase at a given time in a
market at the prevailing price of the related commodity (i.e. substitutes or complementary products) is known
as cross demand. Cross demand may be defined as the change in quantity demand for one goods due to the
change in price of other related goods. Cross demand, therefore, shows the relationship between quantity
demand for one commodity, say X, and the price of related commodity, say Y. Thus,
DX = f(Py)
Where, Dx = Demand for X-good and
PY = Price of Y-good.
Related goods are of two types: Substitute and complementary.

 Substitute goods: Substitute goods are those goods which can be used in place of each other to satisfy a
given want. Coffee and tea, pens and pencils, etc., are the examples of substitute goods. Two goods are said
to be substitute if an increase in the price of one leads to an increase in the quantity demanded of the other.
There is positive relationship between price of one good and demand for another good. For example, demand
for tea increases if the price of coffee increases and vice versa.
Y
D An increase
Price of coffee

in the price
P2 of coffee
leads to an
P1 increase in
the demand
D for tea.

0 X1 X2 X
Quantity demanded for tea

The above graph explains the effect of increase in price of coffee on demand for tea. When the price of coffee
increases from P1 to P2, the demand for tea increases from X1 to X2 assuming other factors remain unchanged.
 Complementary goods: Complementary goods are those goods which are used together to satisfy a given
want. Pen and ink, car and petrol, computers and software, etc. are the examples of complementary goods.
These goods are jointly demanded to fulfill a single want. Two goods are said to be complements if an increase
in the price of one good leads to a fall in the quantity demanded of other. There is inverse relationship between
price of one good and demand for other goods. For example, demand for ink decreases if the price of pen
increases and vice versa.
Y
An increase in
D the price of pen
leads to a
decrease in the
Price of Pen

P2
demand for ink.

P1
D

0 X1 X2 X
Quantity demanded for Ink
The above demand curve explains the relationship between the demand for ink and the price of a complement
(pen). When the price of pen increases from P1 to P2, the demand for ink decreases from X1 to X2 assuming other
factors remain unchanged.

4. Joint Demand: When two or more goods are demanded in conjunction with one another at the same time to
satisfy a single want, it is called as joint demand. For example, pen, ink and paper are demanded together at
 the same time to satisfy the desire for writing an essay. Joint demand is also known as complementary
demand.

5. Composite Demand: When a good is demanded for a several different uses it is called composite demand.
In other words, if a single good or service can be used to satisfy multiple wants, then such a good has a
composite demand. For example, demand for electricity is composite demand because it is used for several
uses like heating, cooking, lighting, etc.

6. Derived Demand and Autonomous Demand: When commodity is demanded as a result of the demand for
another commodity, it is called derived demand. It refers to demand for goods which are needed to produce
another good or service. For example, demand for tires derived from demand for car is a derived demand.
Autonomous demand is the demand for a product that can be independently used. Demand for goods that are
directly used for consumption by the ultimate consumer is known as autonomous demand. For example,
demand for a washing machine is autonomous demand.