Demand and Factors Affecting Demand

Demand

One of the most important building blocks of economic analysis is the concept of demand. In market economies, the system depends majorly on the cooperation between producers and consumers in which consumers have the freedom to spend their money to purchase the best quality products at the lowest price. As people’s wants are unlimited but they can hardly afford to have it all, Demand is defined as the willingness to buy a good or service and the ability to pay for it.

Law of demand

The most famous law in economics is the law of demand. It states that price and quantity demanded have an inverse relationship. When the price of a good or service falls, consumers buy more of it. In contrast, when the price of a good or service increases, consumers buy less of it.

Indeed, the law of demand is ingrained in our way of thinking about everyday things. For instance, shoppers buy more cherries when they are in season and the price is low. Similarly, when bad weather causes the supply of corn reduced,  they know that the price of corn will rise. The price rise will lower the demand for corn, this is the law of demand.

Demand curve

A demand curve illustrates on a graph how much of a particular good or service people are willing to buy as its price changes.

On a graph, the price is indicated on the vertical axis and the quantity demanded is on the horizontal axis. The demand curve generally slopes down from left to right, due to the law of demand while the quantity demanded drops as the price rises for the majority of goods.

Factors affecting demand

Demand for consumer goods can change even when prices are stable. The 7 factors that cause a change in demand include:

1. Price of product

2. Tastes and preferences

3. Consumer’s income

4. Availability of substitutes

5. Number of consumers in the market

6. Consumer’s expectations

7. Elasticity vs inelasticity

Price of product

In general, there is a strong connection between the price of a good and the demand. Higher prices create lower demand and lower prices create higher demand. Some goods are more affected by prices than others due to the price elasticity of demand.

Tastes and preferences

Consumer tastes and preferences have a direct impact on the demand for consumer goods. Unfortunately, these preferences are vastly different among consumer age groups, marital and social status, geography or nationality backgrounds.

Consumer’s income

As a rule, the more money consumers have, the more they like to spend it, buy more and some prefer higher-quality and pricer products. The opposite is also true, during the recession, consumers will spend less than they do in a boom.

For whatever is sold in the market, there will always be competition. A business that does not carefully pay attention to its competitors may end up losing its market share and customers to rivals.

Availability of substitutes

For whatever is sold in the market, there will always be competition. A business that does not carefully pay attention to its competitors may end up losing its market share and customers to rivals.

Number of consumers in the market

Demand can also be determined by how many people are buying a particular product. Therefore, the more consumers available, the greater the demand.

Consumer’s expectations

While past data can help figure out the trends and what could happen in the future, businesses are still exposed to the challenge of anticipating consumers’ habits and expectations as they are influenced by various intrinsic and external factors.

Elasticity and inelasticity

Elastic goods such as clothing, soft drinks, electronics or cars are affected by driving factors like prices, competition and availability. Thus, they tend to have a negative correlation. In contrast, demand for inelastic goods doesn’t fluctuate much from one variable to another. For example, if the price of petrol goes up, the demand for petrol does not significantly decrease because petrol is a necessity for many consumers, particularly for transportation.

References

Econ Port n.d., Factors Affecting Demand, Econ Port, available at <https://www.econport.org/content/handbook/Demand/Factors.html>.

Hassani, A 2018, Write a Comprehensive Note on Law of Demand, Forestrypedia, available at <https://forestrypedia.com/write-comprehensive-note-on-law-of/>

Nielsen Consumer 2022, 7 factors that influence the demand of consumer goods, Nielsen Consumer, available at <https://nielseniq.com/global/en/insights/analysis/2022/7-factors-that-influence-the-demand-of-consumer-goods/>.

Will, K 2024, Demand Curves: What Are They, Types, and Example, Investopedia, available at <https://www.investopedia.com/terms/d/demand-curve.asp>.

Tejvan, P 2021, Factors affecting demand, Economic Help, available at <https://www.economicshelp.org/microessays/equilibrium/demand/>.