Human wants are unlimited. The resources at the disposal of human beings are limited. Hence people are bound to exercise their choice. The satisfaction of human wants is linked with the production of goods and services and their pricing process. The price of good is determined by the forces of demand and supply in the market.
The theory of demand is related to the economic activities of a consumer. The process through which a consumer obtains the goods and services he wants to consume is known as demand. Demand is that effective desire which can be fulfilled.
The demand for a commodity is always at a price and per unit of time. In Economics, demand implies three things. They are desire, ability to pay and willingness to pay.
In the words of Prof. Benham, “The demand for anything at a given price is the amount of it which will be bought per unit of time at that price.”
According to the Prof Hibdon, “Demand means the various quantities of goods that would be purchased per time period at different prices in a given market.”
In the words of Border. “By demand we mean the various quantities of a given commodity or service which consumers would buy in one market in a given period of time and given price.”
Thus, demand for a commodity has not only a reference to price but also to a point of time.
Factors Influencing Demand for a Commodity:
They are many factors on which the demand for a commodity depends. They are called determinants of demand. They are discussed as under:
1. Income of the consumer:
A consumer’s demand is influenced by the size of his income. With increase in the level of income, there is increase in the demand for goods and services. A rise in income causes a rise in consumption. As a result, a consumer buys more. For most of the goods, the income effect is positive. But for the inferior goods, the income effect is negative. That means with a rise in income, demand for inferior goods may fall.
2. Price of the commodity:
Price is a very important factor, which influences demand for the commodity. Generally, demand for the commodity expands when its price falls, in the same way if the price increases, demand for the commodity contracts. It should be noted that it might not happen, if other things do not remain constant.
3. Changes in the prices of related goods:
Sometimes, the demand for a good might be influenced by prices changes of other goods. There are two types of related goods. They are substitutes and complements. Tea and Coffee are good substitutes. A rise in the price of coffee will increase the demand for tea and vice versa. Bread and butter are complements. A fall in the price of bread will increase the demand for butter and vice versa.
4. Tastes and preferences of the consumers:
Demand depends on people’s tastes, preferences, habits and social customs. A change in any of these must bring about a change in demand. For example, if people develop a taste for tea in place of coffee, the demand for tea will increase and that for coffee will decrease.
5. Change in the distribution of income:
If the distribution of income is unequal, there will be many poor people and few rich people in society. The level of demand in such a society will be low. On the other hand, if there is equitable distribution of income, the demand for necessaries commonly consumed by the poor will increase and the demand for luxuries consumed by the rich will decrease. However, the net effect of an equitable distribution of income is an increase in the level of demand.
6. Price expectations:
Expectations of people regarding the future prices of goods also influence their demand. If people anticipate a rise in the prices of goods in future due to some reasons, the demand for goods will rise to avoid more prices in future. Contrarily, if the people expect a fall in price, the demand for the commodity will fall.
7. State of economic activity:
The state of economic activity is major determinant influencing the demand for a commodity. During the period of boom, prosperity prevails in the economy. Investment, employment and income increase. The demand for both capital goods and consumer goods increase. But in period of depression demand declines due to low investment and low income.
The level of demand for a commodity is also influenced by other factors like population, composition of population, taxation policy of the government, advertisement, natural calamities, pattern of saving, inventions and discoveries and outbreak of war, emergencies, weather, technical progress etc.