Answer the following questions in brief
Explain determinants of market demand.
ANSWER:
Market demand for a commodity depends on the following factors:
i. Market price of the good - Other things remaining constant, as the market price of a good rises (or falls), the quantity demanded of the good falls (or rises). Thus, the market price of a good and quantity demanded of that good share a negative relationship.
ii. Market price of other goods – The quantity demanded of a good also depends on the market price of other goods (i.e., related goods). Any two goods are considered to be related to each other when the demand for one good change in response to the change in the market price of the other good. Related goods can be classified into the following categories:
a. Substitute Goods - In case of substitute goods, if the price of one good increases, the consumer shifts his demand towards the other (substitute) good; that is, a rise in the price of one good results in the rise in the demand of the other good and vice versa.
b. Complementary goods - In case of complementary goods, if the price of one good increases, the consumer reduces his demand for the complementary good as well; that is, a rise in the price of one good results in the fall in the demand for the other good and vice versa.
iii. Income of the consumer - Change in the income of the consumer also affects the market demand for goods. The effect of change in income on the market demand depends on the type of the good.
iv. Type of Good: The market demand for normal goods shares a positive relationship with the consumer's income. The market demand for inferior goods (such as coarse cereals) has a negative relationship with the consumer's income. The market demand for Giffen goods also has a negative relationship with the income.
v. Consumer’s tastes and preferences - Consumers' tastes and preferences highly influence the demand for goods. Other things being constant, if all consumers prefer a commodity over another, then the market demand for that commodity increases and vice versa.
vi. Population size - The market demand for a commodity is also affected by the population size. Other things being equal, an increase in the population size increases the market demand for a commodity and a decrease in the population size decreases the market demand for a commodity. This is because with the change in population size, the number of consumers in the market changes; thus, the market demand also changes.
vii. Distribution of income - If the distribution of income in the society is fair and equal, then the demand for a commodity is more compared to a situation where there is unequal distribution of income.
