Economics XII Content
Determinants of demand
- Price: Demand is inversely related to price. If price increases, demand decreases and vice versa. But in case of Giffen goods (goods that are inferior and basic like low quality rice and bread for Nepalese), demand is directly related to price.
- Price of complementary goods: Demand is inversely related to price of complementary goods. The goods which are consumed together to fulfill a single need like brick and cement, pen and ink are called complementary goods. If price of complementary goods rises demand for the commodity decreases and vice versa.
- Price of substitutes: Demand is directly related to price of substitutes. The goods among which we choose one to fulfill our need are called substitutes. They are alternative of and competitive to each other like Coke and Pepsi. If prices of substitutes rise, demand increases and vice versa.
- Income: Demand for normal goods is directly related to income of consumer. If income increases, demand too increases and vice versa. But demand for inferior goods is inversely related to income.
- Population: Demand is directly related to population and number of consumer. If population increases demand too increases and vice versa.
- Taste and preferences: If taste and preference of consumer change in favor of goods, demand increases. If it changes against the goods, demand decreases.
- Tax rates: If government imposes more taxes, the demand decreases and vice versa.
- Advertisement: Demand is directly related to expenditure and advertisement expenditure. More advertisement for a good brings more demand.
- Interest rates: Demand is inversely related to interest rate. If interest rate raises people save more, deposit in banks or lend to earn interest. Due to this reason demand decreases and vice versa.
- Nature of commodity: The demand depends upon the nature of commodities too. The demand for basic goods is relatively inelastic. But demand for luxurious goods is usually elastic.