You are here
Does only price affect demand?
- No. Many other factors change demand, even when the price stays the same:
- Income of the consumer
- Taste and preference of the buyer
- Population
- Seasonality
- Future price expectations
- Price of related goods
- All these are called determinants of demand .
Determinants of demand (besides price)
Determinants of Demand
Factors other than the product's own price
Income
Taste & preference
Population
Seasonality
Future price expectations
Price of related goods
1. How does income affect demand?
-
Example 1
- A person has a low income.
- He buys half a kg of apples.
- Later his salary increases.
- He now buys 2 kg of apples.
- Example 2 - A person with a low income buys clothes from a roadside vendor. A rich person buys branded clothes.
- When income rises, people can buy more or choose higher-quality products. They feel more confident about spending.
- So the demand for several goods rises, even if prices stay the same.
2. How do taste and preference affect demand?
-
Example
- Many small girls prefer dolls like Barbie.
- Many small boys prefer toy cars.
- So the demand for dolls and toy cars comes from different children.
- Every buyer has their own likes and dislikes. These decide what they buy.
3. How does population affect demand?
- Example 1 - A population with more children will have more demand for stationery. A population with more senior citizens will need more medicine shops.
- Example 2 - India has much more demand for phones than Mongolia, because India's population is much larger than Mongolia's.
- Demand depends on the size and composition of a nation's population.
- Size - how many people there are. India is the most populous nation, and its large domestic demand helps its economic growth.
- Composition - who makes up the population.
| More of these people | Higher demand for |
|---|---|
| Children | Sports shoes |
| Working adults | Formal shoes |
| Elderly people | Comfortable or orthopaedic shoes |
4. How does seasonality affect demand?
-
Example
- In winter, there is high demand for sweaters.
- In summer, sweaters go on sale at reduced prices, but their demand stays low.
- Here demand depends on the season, not on the price.
-
People demand different products at different times of the year.
- Example - books at the start of the new academic session; sweets in the festive season.
- This depends on weather, festivals and cultural habits, not on price.
5. How do future price expectations affect demand?
- Example 1 - People expect the price of gold to rise. So they buy more gold today.
-
Example 2
- During COVID, people expected share prices to fall further (a share is a small part of ownership in a company).
- So people stopped buying shares, and many sold the ones they had.
- The demand for shares fell.
- Expecting a future price change changes today's demand, even when today's price has not changed.
| People expect prices to | So they | Today's demand |
|---|---|---|
| Rise | Buy immediately | Rises |
| Fall | Postpone buying | Falls |
6. How does the price of related goods affect demand?
- Related goods - products whose demand is interconnected, meaning a change in the price or availability of one directly affects the demand for the other.
Substitute goods
Complementary goods
Goods that can replace each other
Goods that are used together
Example: Tea and coffee
Example: Movie ticket and popcorn
-
Substitute goods
- Coffee becomes costlier, but tea's price stays the same.
- Some coffee drinkers switch to tea, so the demand for tea rises.
- If the price of one substitute rises, the demand for the other rises .
-
Complementary goods
- Movie tickets become costlier.
- Fewer people go to the cinema, so the demand for popcorn there falls.
- If the price of one complementary good rises, the demand for the other falls .
💭 THINK ABOUT IT
Question: What happens when you consume the first mango? It tastes delicious, right? The second one is good? The third one and so on? You are barely interested in eating mangoes by this point. Why do you think this happens?
- Each extra mango gives less satisfaction ( utility ) than the one before.
- The additional utility or usefulness derived from a product declines as more of it is consumed. This is known as the diminishing marginal utility principle.
- Diminishing means falling. Marginal means from one extra unit.
- As the satisfaction falls, the willingness to pay also falls. So demand falls.
The Law of Diminishing Marginal Utility
1st mango
Delicious
2nd mango
Good
3rd mango onward
Barely interested
↓
Each extra unit gives less satisfaction, so willingness to pay falls and demand falls
🔎 LET'S EXPLORE
Create your own demand schedule for buying notebooks at different prices. At what price would you buy the most? At what price would you stop buying altogether? What could be the reason behind your choices? Also, ask your family members if they postponed or advanced buying any product because of future expectations of changes in price?
Sample answer (yours will differ):
| Price of a notebook | Notebooks I would buy |
|---|---|
| Rs 20 | 8 |
| Rs 40 | 5 |
| Rs 60 | 2 |
| Rs 80 | 0 |
- I would buy the most at Rs 20 , and stop buying at Rs 80 .
- Reasons - my pocket money is limited (ability to pay); I need only a few notebooks, so extra ones give less use (diminishing marginal utility); at a high price, I would use loose sheets instead (a substitute).
- Family example - my parents waited for the Diwali sale to buy a TV (postponed). My family bought gold early because they expected its price to rise (advanced).
📖 Questions from the Book
1. An increase in income always leads to a rise in demand for goods. Defend or refute, giving reasons for the same.
- Refute. The word "always" is wrong.
- The book says a rise in income raises the demand for several goods, not all goods.
-
With more income, people choose
higher-quality
products, so the demand for some cheaper goods can
fall
.
-
Example
- A family whose income rises stops using the bus and buys a car.
- Its demand for bus travel falls.
- Goods like this are called inferior goods .
-
Example
-
For some basic goods, demand hardly changes with income.
- Example - A family does not eat more salt because its income doubled.
📖 Questions from the Book
2. If petrol prices double, what happens to: a. Demand for diesel cars, b. Demand for electric cars, c. Demand for car accessories, d. Demand for public transport?
| Item | Related to petrol cars as | Demand |
|---|---|---|
| a. Diesel cars | Substitute | Rises |
| b. Electric cars | Substitute | Rises |
| c. Car accessories | Complementary (if meant for petrol cars) | May fall |
| d. Public transport | Substitute | Rises |
- a. Running a petrol car becomes costly, so some buyers pick diesel cars.
- b. Electric cars need no petrol, so more people switch to them.
- c. If the accessories are for petrol cars, fewer people buy and use petrol cars, so demand may fall. Accessories that fit all cars (petrol, diesel or electric) may not be affected much, so the effect depends on the type of accessory.
- d. Driving becomes costly, so more people use buses and the metro.
📖 Questions from the Book
10. Categorise the following combination of goods into substitute goods and complementary goods.
| Pair | Type |
|---|---|
| a. Movie ticket and popcorn | Complementary |
| b. Eraser and pencil | Complementary |
| c. Laptop and computer | Substitute |
| d. Air conditioner and cooler | Substitute |
| e. Notebook and pen | Complementary |
| f. Apple and banana | Substitute |
| g. Mobile and earphones | Complementary |
- Note on (c) - a laptop is itself a computer. Here "computer" is read as a desktop computer, which a laptop can replace.
Summary: What are determinants of demand?
- The factors that decide how much of a product people are willing and able to buy.
| Determinant | How it affects demand | Example |
|---|---|---|
| Price of the product itself | Price up, demand down; price down, demand up (Law of Demand) | Srivalli buys more mangoes at Rs 50 |
| Income | Income up, demand for several goods up | Salary rises, 2 kg apples instead of half a kg |
| Taste and preference | People buy what they like | Dolls or toy cars, by choice |
| Population | More people, more demand; who they are decides what is demanded | India buys far more phones than Mongolia |
| Seasonality | Demand changes with weather and festivals | Sweaters sell in winter, not in a summer sale |
| Future price expectations | Expect a rise, buy now; expect a fall, buy later | Gold bought before an expected price rise |
| Price of related goods | Substitute's price up, demand for the other up; complement's price up, demand for the other down | Coffee costlier, more tea bought |
1. Name the determinants of demand.
Show answer
Price of the product, income, taste and preference, population, seasonality, future price expectations, and price of related goods.
2. What is the difference between substitute goods and complementary goods?
Show answer
Substitutes replace each other (tea and coffee). Complementary goods are used together (movie ticket and popcorn).
3. What is the Law of Diminishing Marginal Utility?
Show answer
The extra satisfaction from each additional unit falls as more of it is consumed.
4. Why do sweaters sell little in summer even at a sale price?
Show answer
Demand depends on the season. People do not need sweaters in summer.
5. True or false: If people expect prices to fall, today's demand rises. Give a reason.
Show answer
False. They postpone buying, so today's demand falls.
📝 What Have We Learned
- Demand changes not only with price, but also with income, taste and preference, population, seasons, future price expectations and related goods.
- If a substitute's price rises, demand for the other rises; if a complementary good's price rises, demand for the other falls.
- By the Law of Diminishing Marginal Utility, each extra unit gives less satisfaction, so willingness to pay and demand fall.
