What Affect Demand?

Demand, in economics, is used to refer to the willingness and the ability of a consumer to purchase a good or a service.  For you to fully understand how it works, understanding the “Factors Affecting Demand” makes the picture clearer.  Here are 5 factors that most likely are affecting the market demand.

How Much Does It Cost?

One of the most important considerations, whether buying eggs in the supermarket or a house is how much it costs.  Typically, the higher the price, the less willing and able (demanded) the good or service is.  The vice versa also applies to most goods.  This is the law of demand.

However, there are some goods, like luxury goods, which do not obey this law.  With this category of goods, expensive goods still are consumed.  ThorsteinVeblem suggested that this is because of the prestige associated with them.

How Much Do I Earn?

One of the important factors affecting demand is the how much you earn.  The amount of “disposable income” i.e. Income left over for consumption after tax a consumer has also determines demand.  There are two classes of goods in this respect, normal goods and inferior goods.

Normal goods experience an increase in demand with an increase in income.  This happens with many goods.  Inferior goods on the other hand experience a decrease in demand with an increase in income.  This is because the consumer now can afford better quality products with the extra income that they have received.

Related Goods

There are two classes of related goods: competitor and complimentary.  When we talk about competitor goods, we talk about goods that ensure that since you are consuming one, you cannot consume the other.

These goods are in direct competition since they fulfill the same need.  One famous example is Pepsi and Coke.  Both these soft drinks satisfy the same kind of need.  As a result, when you take Pepsi, you would theoretically get the same satisfaction as taking Coke.

For complimentary goods, these goodsare used together.  This means, that by purchasing one good, you have to inevitably demand the other good.  A great example is cars and gas.  Unless you are running an electric car, you will need to buy gas for your car.

Therefore, by buying a car, you will eventually need to buy gas.  These are important statistics for determining the market size of a target market if you provide the complimentary goods.

I Like This Better

Sometimes, despite all these other factors affecting demand, personal preference wins the day.  Human beings are psychological, and their purchasing decisions are affected by psychological choices.

One may like a certain product, simply because their favorite celebrity is wearing it.  In addition, they may demand a certain good simply because they enjoy it more than another alternative.

I Think This Is Going To Happen

Expectation of future changes may affect demand.  Rumors of impending shortages may lead to mass buying and hoarding.  If a better version of a product is expected, consumers may decide to wait for it and not buy the present version. These all affect demand.