Demand and its determinants. Economics Online Classes Demand and its Determinants Free Notes 2019-01-10

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5 Determinants of Demand with Examples and Formula

demand and its determinants

By definition, there is an inverse relation between the demand for a good and the price of its complement. For example, consumers prefer to purchase a product in a large quantity when the price of the product is less. Nature of change Effect on quantity demanded and hence on demand curve Measure of sensitivity Tastes and preferences individual increase in preference positive, hence expansion of demand curve Tastes and preferences individual decrease in preference negative, hence contraction of demand curve Price of substitute good individual increase in price positive, hence expansion of demand curve see , also Price of substitute good individual decrease in price negative, hence contraction of demand curve see , also Nature of substitute good individual better substitution ambiguous. Normally a larger quantity is demanded at a lower price that at a higher price. The quantity demanded for basic consumer goods increases with increase in the income of a consumer, but up to a fixed limit, while other factors are constant. Expectations of Consumers Imply that expectations of consumers about future changes in the price of a product affect the demand for that product in the short run. The demand for a product decreases with increase in its price, while other factors are constant, and vice versa.

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Economics Online Classes Demand and its Determinants Free Notes

demand and its determinants

On the other hand, when demand for a particular product is independent of the demand for other products, such a demand is called autonomous demand. These are either complementary, those purchased along with a particular good or service, or substitutes, those purchased instead of a certain good or service. The more you have something, the less desireable it becomes. If national income is evenly distributed, market demand for normal goods will be the largest. The complementary goods are inversely related to each other.


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The 5 Determinants of Economic Demand

demand and its determinants

The is government spending on mass transit and education. X increases, then he may increase the pocket money of his children and buy luxury items for his family. In such a case, it is difficult to forecast demand for existing products in future. For example, increase in the prices of petrol would decrease the demand of cars. When the income of the consumers increases, they buy more and when income falls they buy less.

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Economics Online Classes Demand and its Determinants Free Notes

demand and its determinants

Some products have a stronger demand in hilly areas than in plains. Price of Related Goods: Refer to the fact that the demand for a specific product is influenced by the price of related goods to a greater extent. Therefore, consumers usually prefer to purchase a substitute, if the price of a particular good gets increased. High tax rate would generally mean a low demand for the goods. It may be noted at the very outset that a host of factors determines the demand for a product or service. When, price of the substitute of a product tea falls or increase , the demand for the product falls or increases.

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Price Elasticity of Demand

demand and its determinants

However, all these factors are not equally important. For instance, an organization has forecasted that the demand for its product, which is priced at Rs. Such as, tea and coffee, Maggi and Yippie, Pepsi and Coca-Cola are close substitutes for each other. When his money income rises, other factors remaining constant, his demand curve for a commodity will shift to the right. A highly taxed commodity will have a lower demand. When more money circulates among the people, more of a thing is demanded by the people because they have more purchasing power, and vice versa.

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Determinants of Demand

demand and its determinants

But however, if the prices are increased the consumption reduces and as a result demand falls. . An organization, while analysing the effect of one particular determinant on demand, needs to assume other determinants to be constant. So, for a commodity to have demand, the consumer must possess willingness to buy it, the ability or means to buy it, and it must be related to per unit of time i. The effect of advertisement is said to be fruitful if it leads to the upward shift in the demand curve, i. Therefore, individuals demand different products in different climatic conditions.

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What Are Four Determinants of Price Elasticity of Demand?

demand and its determinants

However, the structure of the market decides the degree of price-demand relationship of the company demand: i In the case of perfect competition the degree of substitutability being perfect, the company demand for the product tends to be perfectly elastic. This further helps an organization to hire human resource according to requirement. Demand can be forecasted for a long period or short period. For example, if an organization expects a rise in the demand for its products, it may opt for extra labor to fulfill the increased demand. For such commodities, there is a single demand curve with the usual negative slope.

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The 5 Determinants of Economic Demand

demand and its determinants

For example, the high income segment of the society would prefer luxury goods, while the low income segment would prefer necessary goods. Similarly, an expected increase in income increases the demand for a product. Moreover, the scarcity of specific products in future would also lead to increase in their demand in present. However, it is commonly included in the list of determinants of demand. This is called the law of demand. Hence, each use of the commodity is the rival of the other uses.

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