Basic Business Knowledge

What Is Determinants Of Demand – Examples & Formulas

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Demand is the willingness, desire, and ability of consumer’s to pay the particular amount for a good & service. In the market, when the demand for a particular good or service gets increases than supply then the value of that good or service get increases. And when the demand for a particular good or service gets increases than supply then the value of that good or service get decreases. That is why in any type of economic activity the term demand is a very important factor. But on which things the demand for a good or service depends. So we are going to discuss, What are determinants of demand and how do the determinants affect the demand?

Determinants of Demand

To understand what is determinants of demand, we need to understand the meaning of PITPEN. So let’s understand the PITPEN:

What is Determinants Of Demand - PITPEN Box By BGB
PITPEN Box By BGB
  • P – Price
  • I –  Income of consumer
  • T – Tastes
  • P – Price of Related goods & services
  • E – Expectations
  • N – Number of buyers

P – Price:

When an entrepreneur wants to start up a business with no money, the price is the first and one of the most important determinants of demand. In the market, the price of a particular good or service determines the demand of that good or service.

What is Determinants Of Demand - Price Box By BGB
P – Price Box By BGB

The law of demand –  When the price of a product rise then, the demand for that product falls. And when the price of a product falls then, the demand for that product raises.

So, that is how the price of a product determine the demand of that product.

For Example, organizations like Walmart, IKEA take advantage of this thing and build the core strategies of their business. These type of business organizations purchase their products in huge quantity for very less price. And sell in huge quantity for very less price. Also, they try to keep their margins only some percent. So that, most of the consumer should prefer to purchase only their products. And these organizations get a competitive advantage.

I –  Income of consumer

The quantity of demand of the product depends upon the type of that product when the income of consumer increases or decrease. Let’s understand how

What is Determinants Of Demand - Income Box By BGB
I – Income Box By BGB

For luxurious goods, when the income of consumers increases then the demand for luxurious goods increases. Because of, the reach people try to main ten their higher class by purchasing expensive (luxurious) goods. But for inferior goods, when the income of consumers increases then the demand for inferior goods decreases. Because again, to maintain their higher class.

For luxurious goods, when the income of consumers decreases then the demand for luxurious goods also decreases. Because of, the middle class or poor people can’t afford the price of that expensive (luxurious) product. But for inferior goods, when the income of consumers decreases then the demand for inferior goods increases. Because Missle class or poor peoples can afford only inferior goods.

So, that is how the income of consumers determine the quantity of demand of a particular product.

T – Tastes

The third determinant of demand is the tastes.

What is Determinants Of Demand - Tastes Box By BGB
T- Tastes Box By BGB

Basically, when the taste of consumers increases (according to trend, season, emotion and need) then the quantity of demand also increases. And when the taste of consumers decreases (according to trend, season, emotion and need) then the quantity of demand also decreases.

P – Price of Related goods & services

The demand for a product depends upon the price of its related product either it is a substitute of instead.

What is Determinants Of Demand - Price of Related Product Box By BGB
P – Price of Related Product Box By BGB

In the market, if the price of a good or service rises then the demand of its substitute good or service also rises. And if the price of a good or service falls then the demand of its substitute good or service also falls. As we discussed before the customer wants the product only with good quality and cheap price. So when the customer gets the opportunity to buy the same quality of product at a cheap price then, they shift to the substitute product.

For example,  In the airline industry, Air Asia and Indigo these both are competitors and providing the same service to the customers. So, if the price of Air Asia rises than Indigo then most of the customers will prefer to Indigo airline for the same route. And if the price of Air Asia falls than Indigo then the customers will not prefer to Indigo airline.

In Complimentary goods, again we will take another example. The Petrol & Diesel are the complimentary product of vehicle. So, If Price of vehicle rises, then damnd for petrol and diesel will fall. And If the Price of the vehicle falls, then damnd for petrol and diesel will also rise.

So that is why the price related goods matters for determination of demand.

E – Expectations

Now the expectations of the consumer.  Also the expectations of consumers matters for the determinant of demand.

What is Determinants Of Demand- Expectations Box By BGB
E – Expectations By BGB

To understand this determinant we will take the example of gold. If the customer expects that the rate of the gold will fall in future then the today’s demand for gold will also fall and future demand will rise.  And the rate of the gold will rise in future then the today’s demand for gold will also rise and future demand will fall

N – Number of buyers

The last determinant of demand is Nub=mer of buyers.

What is Determinants Of Demand - Number of buyersBox By BGB
N – Number of Buyers By BGB

If the less number of buyers are there are in the market then obviously, the demand will be less. And If there are more buyers in the market then obviously, the demand will be more.

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