The demand of a good or service can be defined as the quantity that consumers are ready to buy at a given price.
In general, there exists an inverse relationship between the demand of a product and its price. This phenomenon is explained by the law of demand which states that, ceteris paribus, quantity demanded of a commodity falls with a rise in price and rises with a fall in price.
However, in the real world, the demand of a commodity is dependent not only on its price, but also on non price factors like income of the consumers, taste and preference of consumers, prices of related products, future expectations of price change, number of buyers etc.
Thus the factors that determine demand can broadly be categorized into two categories; price determinants and non-price determinants. Presence of these two distinct determinants of demand gives rise to two different but equally important concepts; change in quantity demanded and change in demand.
- Change in Quantity Demanded. A change in quantity demanded refers to the variation in consumers’ demand of a commodity due to a change in its price, other factors remaining constant. Thus, the only factor that causes a change in quantity demanded is price.
In case of change in quantity demanded there is upward or downward movement along the same demand curve. The change in quantity demanded is depicted in fig 1. As the price falls from p to p1, the quantity demanded increases from q to q1 and there is movement along the same demand curve from A to B.
A ‘fall’ or ‘increase’ in quantity demanded due to the change in price is also termed as ‘contraction’ or ‘extension’ of demand.
Fig 1: Change in Quantity Demanded
- Change in Demand. A change in demand refers to an increase or decrease in demand that is brought about by a change in the other factors, except price. Thus a change in demand is a result of non-price determinants coming into force.
Changes in demand as a result of non-price determinants are also termed as increase or decrease in demand, as the case may be. Demand has two inherent characteristics, willingness to buy and ability to buy under the prevailing circumstances. Essentially, the non-price determinants result in a change in the prevailing circumstances which, in turn, lead to a shift in demand.
Unlike, change in quantity demanded, a change in demand entails a shift in the demand curve; either to the left or to the right of the original demand curve. The change in demand is depicted in fig 2. There is an increase in demand when the demand curve shifts from D1 to D2. On the other hand, decrease in demand occurs when the demand curve shifts from D1 to D3.
Fig 2: Change in Demand
There are numerous non-price determinants of demand that lead to a change in demand. Some of these are discussed below:
- 2.1 Tastes and Preferences. Tastes and preferences play a pivotal role in shaping the demand for a product or commodity. In fact, the endeavor of any marketer of goods or services is to alter the tastes and preferences of the consumers so that they like the product that is being sold. The tastes and preferences of consumers are affected by numerous factors like advertising, promotions, cultural environment, government reports etc. For example, if the findings of a government funded research study suggest that ingestion of carbonated drinks like Coke or Pepsi may be harmful to the human body, people may refrain from drinking these products and this may lead to a decrease in demand.
- 2.2 Prices of related products. There exist products in the market that may be substitutes or complements to the product in question. It is reasonable to expect that the prices of these related products have a bearing on the demand of a particular product. It is worthwhile to mention that if the price of a substitute changes, the demand for the product under consideration moves in the same direction as the change in the substitutes price. For example, in case the price of Coke increases, quantity demanded of Pepsi, a substitute, will increase. In case of complementary goods, demand for the product in question and its supplement move in the same direction, for e.g. if the price of computers increase, the demand for computers will fall. And with it, the demand for printers, a complementary good, will also fall.
- 2.3 Future expectations. If the market sentiment suggests that the price of a commodity is expected to rise in the future, it may lead to an increase in the current demand and vice-versa. There is no better example of future expectations having a bearing on demand than the market for stocks, bonds, agricultural commodities etc. Likewise if the prices of automobiles are likely to fall in the near future due to a reduction in tax, it may lead to a decrease in current demand.
- 2.4 Changes in total income. If the incomes of the consumers increase, it is expected that the demand will increase, even if price remains the same. On the contrary, if income falls, demand will also fall. For example, when the income of consumers falls, the demand for cars will also dip. However, in case of inferior goods, the demand will fall with an increase in income because consumers will shift to a superior substitute.
- 2.5 Environmental factors. The political, economic, social, cultural and technological environment prevailing in the country/region may have a direct bearing on demand. For example, apprehensions of a breakout of a war may lead to an enormous increase in demand for necessities and at the same time shrink the demand for luxury items. A very high rate of adoption of technological advancements may leave consumers waiting for the advanced version of the product rendering the current demand to fall.
- 2.6 Population. The population has a direct bearing on the demand for a commodity. More the number of people, higher the likely demand. The demographic profile and changes thereon also significantly affect the demand of particular products. It is for this reason that marketers the world over are eyeing countries like China and India, not only because the economies of these countries are developing at a fast clip but also because of the huge population base.
Lipsey, Richard and Chrystal, Alec. Economics. New York: Oxford University Press, 2007. Print.