When examining demand factors, especially for businesses, it is important to realize that there is a relationship between Individual And Market Demand. These two, though slightly different, share the same causes and are impacted by macro and micro economic variables in the same way, but not the same magnitude. Here are 6 most important factors affecting (influence) individual demand and market demand.
Price Of Good
Individual and market demand are affected by the price of the good or service being offered. The law of demand shows that there is an inverse relationship between price and demand. An increase in one will cause a decrease in the other. This holds true at both the individual and market level.
Price Of Complimentary Goods
A complimentary good is one that is used with another good. For example, when you buy a cooker, you have to buy cooking gas or electricity. Another example would be a car and gas. By buying one good, you have to buy the other in order to use it.
When the price a complimentary good increases all other factors remaining constant and the demand for the others good decreases with it. With an increase in the price of cars, less people will buy gas.
Price Of Substitute Goods
Substitute goods are goods that compete for consumption. When you take one, you substitute it for the other. You consume either one or the other.
This is as long as the substitute is seen as matching or being better in terms of quality. For both individual and market demand, when the price of substitute goods change, there is an effect on the demand.
Income is a major factor influencing individual and market demand. When there is an increase in income, demand for goods increase. This is because there is more money to be spent on the good. A good or service that experiences this is called a “normal” good.
However, some goods experience a decrease in demand with an increase in income. These are classified as “inferior goods”. People purchase these goods because they are cheap and that is what they can afford.
However, as their income increase, they go for better quality goods and services. For example, some people view public transport as an inferior good.
People aim to place themselves at an advantage when they have information about the future. If they expect, for example, to have a shortage of a vital good, they will increase their demand drastically today to beat the shortage. Every year you know winter is coming, so you buy winter clothing before it happens.
Tastes And Preference
Beyond the rational reasons, people purchase simply because they like it. Sometimes they are influenced by fashion trends. Other times it is because a celebrity endorsed a product, or they simply have a taste for it.
Out of all the factors influencing individual and market demand, this is probably the hardest to predict. This is because it is influenced by psychological factors, which are difficult to categorize and tabulate.