Factors Affecting Demand

• Income of the Consumer

Price of the good remaining unchanged, if consumer’s income changes then demand for the good also undergoes a change. In most of the goods, Income and demand are directly related. That means as income rises, demand for the good also rises and vice versa. But in case of inferior goods, income and demand are inversely related. As income rises, demand for these goods falls and as income falls, demand rises. This was first observed by Sir Robert Giffen of Ireland in 19^th century. When income of the industrial workers rose, workers demanded less of potato & bread and purchased more of milk, fish and vegetables. Thus in case of inferior goods, the effect of income on demand is negative.

• Taste and Preference

Taste and preference of the consumer also effect demand for a commodity when a commodity goes out of fashion, its demand falls. Similarly when a person changes his taste from vegetarian to non-vegetarian food, his demand for fish and meat will rise. Now-a-days, due to the advertisement by mass media, the taste and fashion of the consumers are changing rapidly which affect demand accordingly.

• Prices of Related Goods

Goods are related either as substitutes or as complementaries.Tea and coffee are substitutes whereas scooter and petrol are complementaries. In case of substitutes like substitutes whereas scooter and petrol will increase and at the same time demand for petrol will rise. Therefore demand for a good is influenced by the change in prices of related goods.

• Population

The size, composition and growth of population in a country affect the overall demand for various goods and services. When growth of population takes place, the absolute number of consumers rises. This leads to rise in demand for basic necessities like food, clothing, medicine, shelter etc. A fall in population growth will have opposite effect on demand. Again the age and sex composition of population will also affect demand. A rise in Proportion of children will lead to the rise in demand for baby food, toys and chocolates. Similarly if female outnumbers male, then demand for skirt will rise and demand for shirt will fall.

• Climate

A change in climatic condition will affect the demand for a good. For example demand for cold drink goes up in summer. When summer changes to winter, its demand drastically falls. Demand for cotton clothes rises in summer but demand for woolen garments increases in winter. Therefore change season and weather conditions affect the demand for a particular commodity.

• State of Economic Activity

The demand for a good is influenced by the state economic activity in the country. During depression, the demand for goods and services fall. During the prosperity phase when income, employment and investment rise demand rises. During this period the expectation of the people regarding future undergoes a change rapidly affecting demand.

• Distribution of Income

Distribution of income and wealth in the society is an important factor affecting demand. A change in distribution of income in flavor of the poor will raise overall demand for goods and services. This is because poor people consume more from their increased income than the rich. Similarly welfare programme undertaken by the Govt. in the form of free education and health, widow & orphan allowances etc. raise the purchasing power of the power of the poor affecting demand favourably.

• Taxation Policy of the Govt.

Taxation policy (structure and composition) has a dual role to play in affecting the overall demand for the goods and services in the economy. On one hand it effects the disposable income of the people and on the other hand, it affects price of the products. A steeply progressive direct tax reduces income of the people particularly the rich which may reduce their demand for luxury goods, similarly high indirect-tax like sales tax, excise duties etc. will raise the price of the products reducing their demand. If Govt. imposes high tariff on imports, Then demand for foreign goods will fail.

• Advertisement and Sales Promotion Activity

Now-a-days the firms incur heavy expenditure on advertisement and sales promotion activities. These costs of the firm are called selling cost which is different from production cost. Production costs are incurred to meet a given demand while selling costs are incurred to secure demand. Publicity and advertisement through mass media and sales promotion activities thus influence consumer’s preference pattern resulting in increase in demand.

• Demonstration Effect in Consumption

Maintaining a higher standard of living in comparison to income by imitating the prosperous neighgbour is known as demonstration effect in consumption. Due to this effect people demand more than their requirements by following the standard of living of others. This is more relevant for the underdeveloped countries whose consumption pattern is influenced by the life style of the people of the rich countries.