Question

1. What are the determinants of demand? What causes movement along a fixed demand curve and shifting of a demand curve? claim that nntinn nrancec imravec immunity and

Answer 1

Determinants of individual demand-

1. Price of the given commodity- It is the most important factor affecting demand for the given commodity. Generally, there exists an inverse relationship between price and quantity demanded. It means, as price increases, quantity demanded falls due to decrease in the satisfaction level of consumers. Foe example, if the price of commodity (say, tea) increases, its quantity demanded will fall as satisfaction derived from tea will fall due to rise in its price.

2. Price of related goods- Demand for the given commodity is also affected by change in prices of the related goods. related goods are of two types- a. Substitute goods- Substitute goods are those goods which can be used in place of one another for satisfaction of a particular want, like tea and coffee. An increase in the price of substitute leads to increase in the demand for given commodity and vice versa. For example, if price of a substitute good (say, coffee) increases, then demand for given commodity (say, tea) will rise as tea becomes relatively cheaper.

b. Complementary goods- Complementary goods are those goods which are used together to satisfy a particular want, like tea and sugar. An increase in the price of complementary goods leads to a decrease in the demand for given commodity and vice versa. For example, if price of a complementary good (say, sugar) increases, then demand for given commodity (say, tea) will fall as it will be relatively costlier to use both the goods together.

3. Income of the consumer- Demand for a given commodity is also affected by income of the consumer. The effect of change in income on demand depends on the nature of the commodity under consideration.

a. If he given commodity is a normal good, then an increase in income leads to rise in its demand, while a decrease in income reduces the demand.

b. If the given commodity is an inferior good, then an increase in income reduces the demand, while a decrease in income leads to rise in demand.

Example- Suppose, income of a consumer increases. As a result, the consumer reduces the consumption of toned milk and increases consumption of full cream milk. In this case, 'Toned Milk' is an inferior good for the consumer and 'Full Cream Milk' is a normal good.

4. Tastes and preferences- Tastes and preferences of the consumer directly influence the demand for a commodity. They include changes in fashion, customs, habits, etc. If a commodity is in fashion or is preferred by the consumers, then demand for such a commodity rises. On the other hand, demand for a commodity falls, if the consumers have no taste for that commodity.

5. Expectation of change in the price in future- If the price of a certain commodity is expected to increase in near future, then people will buy more of that commodity than what they normally buy. There exists a direct relationship between expectation of change in the prices in future and change in demand in the current period. For example, if the price of petrol is expected to rise in future, its present demand will increase.

Determinants of market demand-

1. Size and composition of population- Market demand for a commodity is affected by size of population in the country. Increase in population in the country. Increase in population raises the market demand, while decrease in population reduces the market demand. Composition of population, i.e. ratio of males, females, children and number of of people in the population also affects the demand for a commodity.

2. Season and weather- The season and weather conditions also affect the market demand for a commodity. For example, during winters, demand for woollen clothes and increases.

3. Distribution of income- If income in the country is equitably distributed, then market demand for commodities will be more. However, if income distribution is uneven, i.e. people are either very rich or very poor, then market demand will remain at lower level.

Movement along the demand curve occurs due to an increase or a decrease in the price of the given commodity. The movement along the same demand curve is either upwards (known as contraction in demand) or downwards (known as expansion in demand).

Shift in the demand curve occurs due to change in other factors, like changes in price of substitutes, change in prices of complementary goods, change in income, etc. Shift in the demand curve is either rightwards (known as increase in demand) or leftwards (known as decrease in demand).