MANAGERIAL ECONOMICS AND FINANCIAL

ANALYSIS

UNIT 1
DEMAND DETERMINANTS

PRESENTED BY

K. SRINIVASAN M.COM., MBA.,(Ph.D.)

ASST. PROFESSOR
SVCET, CHITTOOR
 Demand Determinants or
Factors Affecting Demand
• There are number of factors on which the
demand for a commodity depends.
• These factors are economic, social as well as
political factors.
• Demand function shows the functional
relationship between the demand for a
commodity and its various determinants or
factors affecting it.
 Demand function
• A demand function is a mathematical equation
which expresses the demand of a product or
service as a function of its price and other
factors such as the income, prices of the
substitutes and complementary goods, Taste
and Preferences of Consumers, etc.
 Demand function
• Mathematically, market demand function can be expressed as,
Dx = f (Px, Pr, I, T, E, P, S, ..)
• Where,
• Dx= Demand for commodity x;
• Px= Price of the given commodity x;
• Pr= Price of related goods;
• I = Income of the individual consumer;
• T= Tastes and preferences;
• E= Expectation of future changes;
• P= Size and composition of population;
• S= Season and weather;
 Demand Determinants
1. Price of the Commodity
2. Income of the consumer
3. Price of related goods
4. Taste of the Consumers
5. Wealth
6. Population
7. Govt. Policies
8. Expectations regarding future
9. Climate or Weather
10.State of business condition
 1. Price of the Commodity
• The most important factor affecting quantity
demanded is the price of the commodity.
• The relation between price and demand is
called the Law of Demand.
• It is not only the existing price but also the
expected changes in price, which affect
demand.
 2. Income of the Consumer
• The second most important factor influencing
demand is consumer income.
• In fact, we can establish a relation between the
consumer income and the demand at different
levels of income, price and other things
remaining the same.
• The demand for a normal commodity goes up
when income rises and falls down when income
falls.
 3. Prices of related goods
Related goods can be of two types:
Substitutes and Complementary Goods
• Substitutes which can replace each other in use; for
example, tea and coffee are substitutes.
 The change in price of a substitute has effect on a
commodity’s demand in the same direction in which
price changes.
 The rise in price of coffee shall rise the demand for tea.
 
 3. Prices of related goods
• Complementary Goods are those which are
jointly demanded, such as Car and petrol.
• If the price of Car goes up, their demand is
less as a result of which the demand for petrol
is also less.
• The price and demand go in opposite
direction.
 4. Tastes of the Consumers
• The quantity demanded also depends on
consumer’s tastes and preferences.
• Tastes include fashion, habit, customs, etc.
• As a product becomes more fashionable or
useful, its demand increases.
 4. Tastes of the Consumers
• Examples:
• Big screen televisions, smart phones, electric
vehicles, Immunity products, organic food, trendy
products, and virtual reality games have all
gained in popularity and have experienced
increases in demand.
• As some products gain in popularity, others lose.
• The demand for the less popular products
decreases
 5. Wealth
• The amount demanded of commodity is also affected
by the amount of wealth as well as its distribution.
• The wealthier are the people; higher is the demand
for normal commodities.
• If wealth is more equally distributed, the demand for
necessaries and comforts is more.
• On the other hand, if some people are rich, while the
majorities are poor, the demand for luxuries is
generally higher.
 6. Population
• Increase in population size, increases demand
for necessaries of life. The composition of
population also affects demand.
• Composition of population means the
proportion of young, old and children as well as
the ratio of men to women.
• A change in composition of population has an
effect on the nature of demand for different
commodities.
 7. Government Policies
• The demand for a number of commodities may be
affected by government action. Examples are:
• rules compelling the wearing of helmets by
scooterists,
• statutory warning on cigarette smoking in public
places
• banning the sale of particular products,
• regulations on the emissions from car exhausts,
etc.
 8. Expectations regarding the future
• Today's demand can also depend on consumers'
expectations of future prices, incomes, prices of
related goods and so on.
• For example, consumers demand more of an
item today if they expect the price to increase
in the future.
• Similarly, people who expect their incomes to
increase in the future will often increase their
consumption today.
 9. Climate or weather
• The climate of an area and the weather
prevailing there has a decisive effect on
consumer’s demand.
• In cold areas woolen clothes is demanded.
• During hot summer days, ice creams is very
much in demand.
• On rainy days, ice creams is not so much
demanded.
 10. State of business
• The level of demand for different commodities
also depends upon the business conditions in
the country.
• If the country is passing through boom
conditions, there will be a marked increase in
demand.
• On the other hand, the level of demand goes
down during depression.
 THANK YOU
ANY DOUBTS???