5 Determinants of Demand with Examples and Formula

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determinants of demand

Before understanding the existing 5 demand determinants and its formula you should know what actually demand is and how demand is determined. Demand is the one that drives economic growth in the society or the country. Every person or the other, whether it’s a country, a businessman or a company everyone wants to increase their demand, as higher the demand more will be the profits. Whereas, on the other hand, Governments and central banks to are involved in the process of boosting up the demand in order to end recessions in the country.

What is demand?

In terms of economics, Demand may be defined as the ability of consumers to purchase or consumers’ willingness to buy a certain good or commodity. And here the determinants of elasticity of demand tells us about the demand for a particular good.

For example, you want to know the price of the product ABC in case you want to purchase 100 packets of the product ABC.

And you will compare the price of one product from another when buying in bulk. So, there exists an inverse relationship between the price of goods and the supply of goods.

Likewise, we also have determinants of supply in the market too. So, the relationship or the inverse relationship between the price and quantity is commonly known as the law of demand and this can also be depicted by the graphical representation showing a line with a downward slope.

Demand Equation or Function

the relationship between demand and its five determinants is shown by the demand equation or demand function, which is represented as demand function formula as follows:

qD = f

Here, in the above demand equation

  • qD = represents quantity demanded and
  • F = represents the determinant of demand as (price, income, prices of related goods, tastes, expectations)

And the whole equation represents the relationship between the two. As the change in any one factor of determinants of elasticity of demand, the quantity demanded (qD) changes. This can also be shown by the diagram as follows:

what are the determinants of demand

Image: showing the demand equation or demand function

Here, in the above image, we can see that quantity demanded (qD is represented on X axis and the other 5 determinants of demand that included priced as well as non-price determinants of demand are depicted on the y-axis. Change in any of the determinants of aggregate demand will lead to an overall change in demand quantity.

So, let us first understand what drives demand? As a number of factors known out to be as determinants of demand in economics derive out the demand.

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What are the determinants of demand?

Although there exist determinants of supply and demand in the market. Yet, here the determinants of demand definition include all the factors that cause fluctuations in the demand itself. Therefore, it includes or comprises of the 5 determinants of demand are as follows:

  1. Price or Price of the Product
  2. Income
  3. Prices of Related Goods or services
  4. Tastes or preferences of consumers
  5. Expectations or Consumer Expectations

Note: While in case of aggregate demand or determinants of aggregate demand the number of buyers in the market is classified as the 6th determinant.

determinants of aggregate demand

Let us now understand these 5 determinants of demand in detail.

1. Price or Price of the Product: Price is the first thing that people think of when purchasing a product. And hence, as the price increases, the quantity demanded decreases following an inverse relationship.

For example, XYZ wants to buy apples and has $ 90 in which he purchases 8 kg of apples. Now, the price of apples increased to $ 120 then he purchased only 4 kg of apples. Thus, as the price increased the quantity demanded decreases. So, the demand curve slopes downwards. As when price increased quantity decrease and when price decreased quantity increased.

2. Income: Income follows a straight relationship with the quantity demanded. As the income of a person increased the purchasing power of the person or individual increases too. Thus, the quantity demanded (qD) increases.

But, this takes place only in the case of normal goods and the vice versa happens in case of inferior goods. As in the case of inferior goods, the income increases the quantity demanded decreases.

  • Normal goods
  • Inferior goods

3. Prices of Related Goods or services: Prices of Related Goods or services include substitutes goods and complementary goods.

  • Substitute Goods: In the case of substitute goods people prefer one good over the other thus resulting in an increase in the price of good A and an increase in demand of good B. As goods A and B are both substitutes of each other.
    • For example, Coke and Pepsi are both substitute good for each other. If the price of coke increases then people will prefer to buy Pepsi over coke and thus, demand or say qD (quantity demanded) of Pepsi increases.
  • Complimentary goods: In the case of complementary goods, an increase in the price of Good A will decrease demand for the complementary good B. As, complimentary goods are the ones that are used together. Thus, a change in the price of one of the goods has an impact on the other good demand or quantity demanded (qD).
    • For example, Cars and petrol or say mobile and telecom recharges are complementary goods. If the price of telecom recharge plans increases, the quantity demanded for mobile phones decreases.

4. Tastes or preferences of consumers: an individual’s taste for the item also has an impact on the quantity demanded of a product. So, as the taster and preference of a particular product increase, the quantity demanded (qD) of the product also increases, and when the taste and preference of a product decreases the quantity demanded (qD) also decreases, following a straight relationship between the quantity demanded and determinants of price elasticity of demand.

5. Expectations or Consumer Expectations: High expectation of income or expectation of a product can invariably lead to a high price of the product in the future which will lead to an increase in quantity demanded (qD). Whereas, low expectation of income or low pricing of goods will lead to decrees in quantity demanded (qD).

Apart from the 5 determinants of demand we also have another demand determinant in case of aggregate demand or determinants of aggregate demand we also have a 6th determinant as the number of buyers in the market.

6. Number of Buyers in the market: Though, it is not classified into the 5 determinants of individual demand, still, the number of buyers in the market is an important factor that affects the quantity demanded. As the number of buyers in the market increases so does the quantity demanded also increases and when the number of buyers in the market decreases the quantity demanded (qD) also decreases following a straight relationship between the two.

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Difference between demand and quantity demanded:

Both the concepts of demand and quantity demanded are different from each other. As demand is represented by the demand curve or say demand schedule whereas, quantity demanded (qD) is one particular pint at demand curve at a specific price or point depicting at particular price how much quantity is demanded.

Quantity demanded is a term used to know how much of a quantity or the total amount of a good or service a particular consumer wants to purchase, and the existing relationship between the quantity demanded and the price is referred to as demand. Thus the difference between demand and quantity demanded is clear.

Conclusion:

There should be a proper understanding of the relationship between the demand and its every determinant in order to analyze and evaluate the individual and market demand of a particular product in the market. Thus, while analysing one particular determinant on demand, you need to assume other determinants as constant. As every determinant of demand has an effect on the quantity demanded.

Frequently Asked Questions 

What are the 5 determinants of demand?

The 5 determinants of demand are the following:

  • Price or Price of the Product
  • Income
  • Prices of Related Goods or services
  • Tastes or preferences of consumers
  • Expectations or Consumer Expectations

What are the 7 determinants of demand?

The 7 determinants of demand are the following:

  • A change in buyers’ real incomes or wealth.
  • Buyers’ tastes and preferences.
  • The prices of related products or services.
  • Buyers’ expectations of the product’s future price.
  • Buyers’ expectations of their future income and wealth.
  • The number of buyers or say the population
  • Income Distribution

What are the 6 determinants of demand?

The 6 determinants of demand are the following:

  • A change in buyers’ real incomes or wealth.
  • Buyers’ tastes and preferences.
  • The prices of related products or services.
  • Buyers’ expectations of the product’s future price.
  • Buyers’ expectations of their future income and wealth.
  • The number of buyers or say the population

What are the 10 determinants of demand?

The 10 determinants of demand are the following:

  • Price or Price of the Product
  • Income
  • Prices of Related Goods or services
  • Tastes or preferences of consumers
  • Expectations or Consumer Expectations
  • Effect of Advertisements
  • Distribution of Income in the Society
  • Growth of Population
  • Government Policy
  • Climatic Conditions

What are three Demand Determinants?

Three Demand Determinants are the following:

  • Price of the Product
  • The income of the Consumers.
  • Prices of related goods or services.

What are the 4 determinants of demand?

The 4 determinants of demand are the following:

  • Price of the Product
  • The income of the Consumers.
  • Prices of related goods or services.
  • Consumer Expectations.
  • Number of Buyers in the Market.

What are the major determinants of price elasticity of demand?

The major determinants of price elasticity of demand are the following:

  • The availability of substitutes
  • The timeframe
  • The share of income
  • Whether a good is a luxury vs. A necessity and
  • How narrowly the market

What are the determinants of demand Quizlet?

The determinants of demand Quizlet are as follows:

  • Tastes (demand)
  • Number of Buyers (demand).
  • Income (demand)
  • Prices of Related Goods (demand)
  • Consumer Expectations (demand)
  • Resource Prices (supply)

What are the major determinants of price elasticity of demand?

The major determinants of price elasticity of demand are as follows:

  • availability of substitutes
  • the timeframe
  • the share of income
  • whether a good is a luxury vs. a necessity and
  • how narrowly the market is defined.

What are the 5 non price determinants of supply?

The 5 non price determinants of supply are as follows:

  • taxes & subsidies
  • technology
  • number of sellers
  • price of other products
  • expectations and
  • resources.

What are the determinants of demand and supply?

The determinants of demand and supply are as follows:

  • Tastes, preferences, and/or popularity.
  • The number of buyers.
  • The income of buyers.
  • Price of a substitute good.
  • Price of complementary goods.
  • Expectations of the future prices of goods.

Which of the following are determinants of demand?

  • Tastes, preferences, and/or popularity.
  • The number of buyers.
  • The income of buyers
  • Technology
  • Humans
  • Price of complementary goods.

Here in the above given options, Tastes, preferences, and/or popularity, the number of buyers, the income of buyers and Price of complementary goods are determinants of demand.

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