The demand changes as a result of changes in price, other factors determining it being held constant. We shall explain below in detail how these other factors determine market demand for a commodity.
These other factors determine the position or level of demand curve of a commodity.
It may be noted that when there is a change in these non-price factors, the whole curve shifts rightward or leftward as the case may be. The following factors determine market demand for a commodity.
1. Tastes and Preferences of the Consumers:
An important factor which determines the demand for a good is the tastes and preferences of the consumers for it. A good for which consumers’ tastes and preferences are greater, its demand would be large and its demand curve will therefore lie at a higher level. People’s tastes and preferences for various goods often change and as a result there is change in demand for them.
The changes in demand for various goods occur due to the changes in fashion and also due to the pressure of advertisements by the manufacturers and sellers of different products. On the contrary, when certain goods go out of fashion or people’s tastes and preferences no longer remain favourable to them, the demand for them decreases.
2. Income of the People:
The demand for goods also depends upon the incomes of the people. The greater the incomes of the people, the greater will be their demand for goods. In drawing the demand schedule or the demand curve for a good we take income of the people as given and constant. When as a result of the rise in the income of the people, the demand increases, the whole of the demand curve shifts upward and vice versa.
The greater income means the greater purchasing power. Therefore, when incomes of the people increase, they can afford to buy more. It is because of this reason that increase in income has a positive effect on the demand for a good.
When the incomes of the people fall, they would demand less of a good and as a result the demand curve will shift downward. For instance, as a result of economic growth in India the incomes of the people have greatly increased owing to the large investment expenditure on the development schemes by the Government and the private sector.
As a result of this increase in incomes, the demand for good grains and other consumer goods has greatly increased. Likewise, when because of drought in a year the agriculture production greatly falls, the incomes of the farmers decline. As a result of the decline in incomes of the farmers, they will demand less of the cotton cloth and other manufactured products.
3. Changes in Prices of the Related Goods:
The demand for a good is also affected by the prices of other goods, especially those which are related to it as substitutes or complements. When we draw the demand schedule or the demand curve for a good we take the prices of the related goods as remaining constant.
Therefore, when the prices of the related goods, substitutes or complements, change, the whole demand curve would change its position; it will shift upward or downward as the case may be. When the price of a substitute for a good falls, the demand for that good will decline and when the price of the substitute rises, the demand for that good will increase.
For example, when price of tea and incomes of the people remain the same but the price of coffee falls, the consumers would demand less of tea than before. Tea and coffee are very close substitutes. Therefore, when coffee becomes cheaper, the consumers substitute coffee for tea and as a result the demand for tea declines. The goods which are complementary with each other, the fall in the price of any of them would favorably affect the demand for the other.
For instance, if price of milk falls, the demand for sugar would also be favorably affected. When people would take more milk, the demand for sugar will also increase. Likewise, when the price of cars falls, the quantity demanded of them would increase which in turn will increase the demand for petrol.
4. Advertisement Expenditure:
Advertisement expenditure made by a firm to promote the sales of its product is an important factor determining demand for a product, especially of the product of the firm which gives advertisements. The purpose of advertisement is to influence the consumers in favour of a product. Advertisements are given in various media such as newspapers, radio, and television. Advertisements for goods are repeated several times so that consumers are convinced about their superior quality. When advertisements prove successful they cause an increase in the demand for the product.
5. The Number of Consumers in the Market:
The marketdemandfor a good is obtained by adding up the individual demands of the present as well as prospective consumers of a good at various possible prices. The greater the number of consumers of a good, the greater the market demand for it.
Now, the question arises on what factors the number of consumers for a good depends. If the consumers substitute one good for another, then the number of consumers for the good which has been substituted by the other will decline and for the good which has been used in place of the others, the number of consumers will increase.
Besides, when the seller of a good succeeds in finding out new markets for his good and as a result the market for his good expands the number of consumers for that good will increase. Another important cause for the increase in the number of consumers is the growth in population. For instance, in India the demand for many essential goods, especially food grains, has increased because of the increase in the population of the country and the resultant increase in the number of consumers for them.
6. Consumers’ Expectations with Regard to Future Prices:
Another factor which influences the demand for goods is consumers’ expectations with regard to future prices of the goods. If due to some reason, consumers expect that in the near future prices of the goods would rise, then in the present they would demand greater quantities of the goods so that in the future they should not have to pay higher prices. Similarly, when the consumers expect that in the future the prices of goods will fall, then in the present they will postpone a part of the consumption of goods with the result that their present demand for goods will decrease.
Increase in Demand and Shifts in Demand Curve:
When demand changes due to the factors other than price, there is a shift in the whole demand curve. As mentioned above, apart from price, demand for a commodity is determined by incomes of the consumers, his tastes and preferences, prices of related goods. Thus, when there is any change in these factors, it will cause a shift in demand curve.
For example, if incomes of the consumers increase, say due to the hike in their wages and salaries or due to the grant of dearness allowance, they will demand more of a good, say cloth, at each price. This will cause a shift in the demand curve to the right. Similarly, if preferences of the people for a commodity, say colour TV, become greater, their demand for colour TV will increase, that is, the demand curve will shift to the right and, therefore, at each price they will demand more colour TV.
The other important factor which can cause an increase in demand for a commodity is the expectations about future prices. If people expect that price of a commodity is likely to go up in future, they will try to purchase the commodity, especially a durable one, in the current period which will boost the current demand for the goods and cause a shift in the demand curve to the right.
As seen above, the prices of related commodities such as substitutes and complements can also change the demand for a commodity. For example, if the price of coffee rises other factors remaining the constant, this will cause the demand for tea, a substitute for coffee, to increase and its demand curve to shift to the right.
Decrease in Demand and Shift in the Demand Curve:
If there are adverse changes in the factors influencing demand, it will lead to the decrease in demand causing a shift in the demand curve. For example, if due to inadequate rainfall agricultural production in a year declines this will cause a fall in the incomes of the farmers. This fall incomes of the farmers will cause a decrease in the demand for industrial products, say cloth, and will result in a shift in the demand curve to the left.
Similarly, change in preferences for commodities can also affect the demand. For example, when colour TVs came to India people’s greater preference for them led to the increase in their demand. But this brought about decrease in demand for black and white TVs causing leftward shift in demand curve for these black and white TVs.
The decrease in demand does not occur due to the rise in price but due to the changes in other determinants of demand. Decrease in demand for a commodity may occur due to the fall in the prices of its substitutes, rise in the prices of complements of that commodity and if the people expect that price of a good will fall in future.