6 Important Factors That Influence the Demand of Goods
That suggests at least two factors in addition to price that affect demand. A demand curve or a supply curve is a relationship between two, and only two. Even though the focus in economics is on the relationship between the price of a product and how much consumers are willing and able to buy, it is important to. term relationship between relative price series and economic factors recognized in literature. It was found that exchange rate and differences in productivity.
It is generally valid in most of the situations. But there are some situations under which there may be direct relationship between price and quantity demanded of a commodity.
These exceptions are known as exceptions to the law of demand. Sometimes they think like high price commodity is better in the quality.
Thus with the increase in price, demand increases. LPG gas, Petrol, etc. Prices of such commodities increases, demand does not show any tendency to contract and it negatives the law. If consumers measure the desired ability of the utility of a commodity, solely by its price and nothing else, then they tend to buy more of the commodity at higher price and less of it at lower price. Gold ornaments, Diamonds, hair paintings. Higher the price of the good, greater will be the prestige of the buyer in the society and vice-versa.
However, there are two main differences on the supply side of factors of production and products. Firstly, in product market, the supply of a product is determined by its marginal cost of production. On the other hand, in factor market, it is not possible to determine the supply of factors on the basis of marginal cost.
What factors change demand? (article) | Khan Academy
For example, it is difficult to ascertain the exact cost of production for factors, such as land and capital. Secondly, the supply of factors of production cannot be readily adjusted as in the case of products.
For instance, if the demand for a land increases, then it is not possible to increase its supply immediately. Concept of Factor Pricing: Factor pricing is associated with the prices that an entrepreneur pays to avail the services rendered by the factors of production.
These factors of production directly affect the production process of an organization. In context of an economy, these four factors of production when combined together produce a net aggregate of products, which is termed as national income. Therefore, it is important to determine the prices of these four factors of production. The theory of factor pricing deals with the determination of the share prices of four factors of production, namely land, labor, capital and enterprise.
In other words, the theory of factor pricing is concerned with the principles according to which the price of each factor of production is determined and distributed. Therefore, the theory of factor pricing is also known as theory of distribution. Refers to the aspect in which an organization pays a certain amount to avail the services of factors of production.Relation between TP and MP & Relation between MP and AP, production function and returns to factor
Another important cause for the increase in the number of consumers is the growth in population. For instance, in India the demand for many essential goods, especially food grains, has increased because of the increase in the population of the country and the resultant increase in the number of consumers for them.
If due to some reason, consumers expect that in the near future prices of the goods would rise, then in the present they would demand greater quantities of the goods so that in the future they should not have to pay higher prices. Similarly, when the consumers expect that in the future the prices of goods will fall, then in the present they will postpone a part of the consumption of goods with the result that their present demand for goods will decrease.
Increase in Demand and Shifts in Demand Curve: When demand changes due to the factors other than price, there is a shift in the whole demand curve. As mentioned above, apart from price, demand for a commodity is determined by incomes of the consumers, his tastes and preferences, prices of related goods. Thus, when there is any change in these factors, it will cause a shift in demand curve.
What factors change demand?
For example, if incomes of the consumers increase, say due to the hike in their wages and salaries or due to the grant of dearness allowance, they will demand more of a good, say cloth, at each price.
This will cause a shift in the demand curve to the right.
Similarly, if preferences of the people for a commodity, say colour TV, become greater, their demand for colour TV will increase, that is, the demand curve will shift to the right and, therefore, at each price they will demand more colour TV.
The other important factor which can cause an increase in demand for a commodity is the expectations about future prices. If people expect that price of a commodity is likely to go up in future, they will try to purchase the commodity, especially a durable one, in the current period which will boost the current demand for the goods and cause a shift in the demand curve to the right. As seen above, the prices of related commodities such as substitutes and complements can also change the demand for a commodity.
For example, if the price of coffee rises other factors remaining the constant, this will cause the demand for tea, a substitute for coffee, to increase and its demand curve to shift to the right.
Decrease in Demand and Shift in the Demand Curve: If there are adverse changes in the factors influencing demand, it will lead to the decrease in demand causing a shift in the demand curve. For example, if due to inadequate rainfall agricultural production in a year declines this will cause a fall in the incomes of the farmers. This fall incomes of the farmers will cause a decrease in the demand for industrial products, say cloth, and will result in a shift in the demand curve to the left.
Similarly, change in preferences for commodities can also affect the demand. But this brought about decrease in demand for black and white TVs causing leftward shift in demand curve for these black and white TVs.
The decrease in demand does not occur due to the rise in price but due to the changes in other determinants of demand.