Some of the determining factors of demand are the price of the product, the consumer’s income, the price of complementary goods or services, the price of substitute products or the consumer’s taste, among others. In this article we will provide you the information about the Determinants of demand.
In economics, demand refers to the quantity of goods and services that are purchased by consumers at a given price in a given period of time. Likewise, demand is the consumer’s need or desire to buy a particular product or service.
The previous concept shows that demand is the axis on which the economy turns, since the greater the quantity of products that a consumer demands, the greater the production of that product.
Without demand, no company would bother to produce, which would mean unemployment in the economic system. The most effective way to understand how determinants affect demand is to assume that only one determinant varies at a time.
This principle is known as ceteris paribus , which in Latin means “all other things remain unchanged”. Next, we show how each determinant affects demand individually ( ceteris paribus ).
Main determinants of demand
Price of a good or service
The relationship between the price of a good or service and demand can be observed in the law of demand. This economic principle states that if the price of a product increases, fewer people will want to buy it, that is, the demand will decrease.
The same happens in reverse: if the price of a product decreases, more consumers will want to buy it, increasing the demand for it.
However, since price is not the only element that affects demand, the law of demand will apply only if the other determinants do not change.
consumer income
If the consumer’s income increases, he will be able to buy more products. However, if an individual’s income doubles, this does not mean that twice as many products will necessarily be purchased.
The first product satisfies the need and the second ensures that the need has actually been met; from here, marginal utility kicks in.
Marginal utility is defined as the degree of satisfaction or society . For this reason, the individual’s happiness that a good generates. The law of diminishing utility states that if an individual consumes additional units of a good, there will come a point where the good will not satisfy the consumer, but will cause discomfort.
For example, one cup of ice cream is delicious the first time it is consumed, a second cup of ice cream might also be satisfying, but ten cups would be disgusting and might even make the consumer sick.
On the other hand, if the consumer has a really high income, he will be able to buy products with higher prices, also increasing the demand for expensive products.
Price of complementary goods
Complementary assets are those necessary for the operation of another asset. For example, gasoline is a complementary good for cars. Another example of a complementary good is ink and printer paper.
The increase in the prices of complementary goods generates an increase in the money that must be invested for the use of the demanded product.
For example, if the price of gasoline increases dramatically, demand for automobiles will decrease.
Price of substitute products
A substitute product is one that can satisfy the need generated by another well-demanded product.
For example, margarine is a substitute for butter; if the price of margarine decreases, the demand for the substitute will increase, while the demand for butter will decrease. If the price of the substitute increases, the opposite reaction will occur.
Another example of a good replacement is Samsung phones, which replace iPhones.
However, the Apple company continually innovates its products; That way, if a new Samsung phone comes out on the market that seeks to replace iPhones or iPods, Apple releases an improved product to prevent Samsung from being a replacement.
consumer taste
When the preferences of a group of consumers opt for a certain product, the demand for that product increases.
Companies try to attract the attention of consumers through advertising. For example, Coca-Cola has attracted the attention of consumers thanks to its creative and inspiring commercials, making this drink a favorite over others available on the market.
Expectation that the price of a good will rise
When people expect the price of a good to rise, they often buy more of that good as an investment (since in the future they may resell it for a higher price than they paid), which increases demand.
For example, if house prices go up, people will want to buy them, as it will be a great investment.
Number of active buyers in the market
The number of consumers affects aggregate demand. The more consumers enter the market, the greater the chance that demand will increase.
Other factors that affect demand
There are other factors that affect demand, among which the quality of the product and the climate stand out.
Product quality
The quality of a product increases demand regardless of its price, because if an expensive good quality product lasts longer than a cheap and low quality product.
Climate
Weather causes demand for certain products to increase or decrease. For example, during the summer, demand for holiday-related products (swimwear, buoys) increases.
However, in winter, the demand for these products decreases, while the demand for coats, blouses, scarves, among others, increases.
