FACTORS INFLUENCING DEMAND
The following are the major factors that influence (affect) demand for a commodity.
- Consumer’s income: The most important factor influencing demand for a product is consumer’s income. The higher the level of income of a consumer, the higher the level of his demand for almost all goods and services, and vice versa.
- Price of the commodity: The demands for goods with low prices are higher than the demands for goods with high prices. As the prices of goods rise their demands fall. On the other hand, as their prices fall, their demands rise. Hence, it is said that ‘the lower the price, the higher the quantity demanded’, and vice versa.
- Consumer’s taste and fashion: Usually, it is the consumer’s interest in a particular thing (commodity) that encourages or urges him to demand for it. In a period when people develop much taste for a particular commodity, or a change of taste in favour of a commodity, e.g. stove, its demand increases even though its price is constant or increases. Similarly, a change of fashion can also make demand to change. A rise in the use of hair-tie by a large number of women in our society has led to a rise in its demand Whereas a change of fashion or taste against a commodity causes a fall in its demand.
- Population size: The population size affects the level of demand for goods and services. The larger the population, the higher the level of demand for goods and services, and vice versa.
- Number of consumers: Number of consumers for a particular commodity also affects its demand. The higher the number of consumers for a particular item, like a recommended textbook, the higher the demand for the book, and vice versa.
- Availability of substitute: The availability of substitutes for goods sold at the same price causes a fall in demand for the goods. For instance, the availability of substitutes like biro, margarine and pork adversely affects the demands for the main products: pen, butter, and beef (meat) as consumers often divert their money to the purchases of the substitutes if the prices of the major items rise.
- Prices of other goods: The prices of another commodities can affect the demand for a particular item. This occurs when such goods are either substitute or complement. In the case of a substitute, a rise in the price of one may cause an increase in the demand for the other. However, if goods are complementary, a rise in price of one reduces demand for the other.
- Prevailing climatic condition – weather: A certain climatic condition – prevailing weather causes a rise in demand for some goods and a fall in demand for others. A sudden heavy rainfall immediately causes a high demand for umbrellas, rain coats, rain boots, etc. The same weather, rainy season, causes a fall in demand for other group of goods like ice-water, ice cream, fan, air-conditioners, etc
- Government policy: Government policies (rules and regulations) have both favourable and unfavourable effects on demand for goods and services. Government policy against consumption of certain goods like alcoholic drink, cigarette, etc, or increase in taxes, e.g. import and excise duties, greatly reduce demand for the affected goods. Whereas government’s subsidy (reducing cost of goods) on essential goods, e.g. petrol, cow, rice, etc. and eliminating indirect taxes on goods make prices to fall; and they cause a rise in demand.
- Festivities: During the periods of festivities, e.g Christmas, Easter and Ramadan periods, demand for certain goods, e.g. rice, chicken, ram, etc rises very high irrespective of increase in their prices. And their demands fall after the festival season.
- Level of economic activity – boom and slump: The level of economic activity affects demand for goods and services. A rise in the level of economic activity, like economic boom, causes great rise in demand for all types of goods and services as it brings about a rise in the level of employment and income (profit). While a fall in economic activity, like economic slump, causes a great fall in demand as slump raises level of unemployment and a fall in income (profit).
- Technological development: Technological progress (use of modern machines) causes a rise in the quality and quantity of a product (e.g. modern rice) and a fall in its unit cost and price. This brings about increase in its demand. Whereas the use of crude method of production lowers the quality and quantity of a product and a fall in its demand.
- Anticipation of changes in prices: If consumers thought that there would be a great rise in prices in the future, they tend to buy more of the commodities (e.g. chicken, rice, textbooks, etc), and vice versa.
- Distribution of income: If income is evenly (almost equally) distributed among the people, there will be a high demand for almost all goods and services in a society. But if a very large part of a country’s income is in the hands of a very few people (the rich) and the majority of the people have little money or none, the general level of demand for goods and services will be quite low.
- Availability of credit facility: The availability of capital and credit facility encourages people, especially businessmen, to set up new business units, like shops, factories, and expand the existing ones. This causes a rise in demand for capital goods. Whereas absence of credit facility makes economic activity to go down. And it causes a fall in demand for certain goods.
- Level of advertising on a product: An intensive and extensive advertising programmes on products (e.g. GSM, vehicles, etc) increase demand for products. Whereas little or none advertising activity on certain goods (e.g. textbooks, furniture, etc), all things being equal, makes their demand to be either constant or falling.