Question

What specific factors influence the demand for the products/services by consumers (e.g.: advertising, weather, location, interest rates...)? Explain briefly how each of these factors influences demand for the product.

Answer 1

Factors Influencing Demand for a Product

There are so many factors which affect the demand for a product by the consumer. The important among them are listed below.

1. Price of the product

Price of the product is commonly recognized as the most important determinant of the demand for a product. If other things remaining the same, if the price of a product falls the quantity demanded of that product will rice and vice versa. Since the financial resource of most people is limited, price seems to be the single most important determinant of the demand for a product.

2. Taste and preferences of the consumer

Consumers taste and preference are another important determinant of the demand for a product. For example if a person does not like to drink coffee he will not purchase coffee and vice versa. But consumers’ taste and preferences may vary from time to time. Demonstration and Bandwagon effects have a role in affecting the taste and preferences of the consumer.

3. Consumer’s expectations

Consumer’s expectations are another important determinant of the demand for a product. If the consumer thinks that there are chances to a rise in price in the near future, then he may purchase the product in more quantities to avoid future loss due to price hike and vice versa.

4. Income of the consumer

Income of the consumer is another important determinant of the demand for a product. Purchasing power of a person is heavily dependent on his income. In most cases a person purchase more quantity of a product when his money income is large.

5. Price of related commodities

Price of related commodities is another important determinant of the demand for a product. Related goods may be substitute good or complementary good. In the case of substitute goods price of the substitute and demand for the good under consideration moves in the same direction. But in the case of complementary goods price of the complementary good and demand for the good under consideration moves in the opposite direction.

6. Advertisement

Advertisement is another important determinant of the demand for a product. There is a positive relationship between advertisement expenditure and demand for a product. It is because advertisements can positively affect the sale of a product by making a product familiar to the consumer.

7. Weather

Weather is another important determinant of the demand for a product. For example during summer most people interested to have ice creams or cool drinks in their consumption bundle. But the same peoples demand may be different in winter season and they may prefer hot drinks instead of cool drinks.

8. Location

Location is another important determinant of the demand for a product. Closer location of a product or its production unit to the consumer can positively affect the demand for that product.

9. Composition of population

Composition of population is another important determinant of the demand for a product. Demand of younger, elder and old people is different for various reasons. Thus the composition of population in a country can affect the demand for different goods in a country.

10. Interest rate and credit facilities

Interest rate and credit facilities are other important determinants of the demand for a product. A reduction in interest rate and increase in credit facilities can positively affect the demand for a product.

These are the most important factors determining the demand for a product by a consumer.