Question

Describe the various factors affecting demand with strong example for each determinant.

Answer 1

Following are the factors that affect demand of a good:

- Income of the person: Income of the individual is the important factor in determining the quantity demanded of a good. An increase in the income raises the purchasing power of the person. So, the quantity demanded increaes. However, a fall in the income reduces the quantity demanded. For example, if person currently earns 5000 INR today and purchases 50 units of a commodity, an increase in the income to 10,000 INR would allow him to purchase more than 50 units of the same commodity.

 

- Price of Related Goods: Related goods are of two types: one is complementary goods and the other is substitutes goods. For complementary goods, a fall in its price increases the quantity demanded of the good in question and vice - versa. For example, car and petrol are complementary. A fall in the price of Car leads to more petrol consumption as people would be purchasing more cars at lesser prices.

On the other hand, a fall in the price of substitute good leads decreases the quantity demanded of good in question. For example, Tea and coffee are substitutes of each other. A fall in the price of coffee makes it less expensive. So, consumer starts purchasing more coffee and less tea and the quantity demanded of tea declines.

 

- Consumer's preferences: if consumers' preferences towards a good are favorable, then the quantity demanded of a good increases and vice-versa. For example, In a rainy season, people preferences towards purchasing umbrellas become favourable and the quantity demanded of umbrellas increases.