Meaning of Demand and Determinants of Demand

In everyday language, 'demand' is often confused with 'desire' or 'need' — but Economics gives the word a much more precise, technical meaning. Demand for a commodity is the quantity of that commodity which a consumer is willing to buy and is able to pay for, at a given price, during a given period of time. Three conditions must hold together before a mere desire turns into economic demand: (i) a genuine desire to buy the commodity, (ii) willingness to spend money to satisfy that desire, and (iii) ability to pay — sufficient purchasing power to actually buy it. A person may desire a car and even be willing to spend on one, but without the purchasing power the desire never becomes demand in the economic sense; conversely, a wealthy person who has the money but no wish to buy a particular good also creates no demand for it. Demand is always expressed at a given price and over a given period of time (a day, a week, a month) — saying simply that 'the demand for mangoes is 10 kg' means nothing without stating both the price and the time period the quantity refers to.

Determinants of demand are the factors that decide how much of a commodity people are willing and able to buy. The Maharashtra HSC (MSBSHSE) Economics syllabus lists the following as the principal determinants of demand:

• Price of the commodity itself — the single most important determinant, and the one the Law of Demand isolates for special study.
• Income of the consumer — as income rises, demand for most (normal) goods rises; demand for a few (inferior) goods may actually fall as income rises, because the consumer switches to better substitutes.
• Price of related goods — a rise in the price of a substitute (tea for coffee) raises demand for the good in question, while a rise in the price of a complement (sugar used along with tea) lowers demand for the good it accompanies.
• Tastes, preferences and fashion — a change in fashion, habit or taste in favour of a good raises its demand, and a change against it lowers demand, independent of any change in price or income.
• Expectations of future price changes — if consumers expect a commodity's price to rise further in future, current demand rises as buyers purchase in anticipation; if they expect the price to fall further, current demand falls as purchases are postponed.
• Size and composition of population — a larger population, or a larger share of people in the age group that consumes a particular good, raises demand for it.
• Distribution of income — a more equal distribution of national income tends to raise demand for mass-consumption goods, while a highly unequal distribution concentrates demand on luxuries.
• Government policy — taxes (which raise the effective price a buyer pays) tend to reduce demand, while subsidies (which lower it) tend to raise demand.
• Advertising and sales promotion — effective advertising can shift consumer preference toward a good and raise its demand even without any change in the good's own price.

Economics studies the relationship between the price of a commodity and the quantity demanded of it by deliberately holding every other determinant constant — this is the assumption of 'other things remaining the same', and it is exactly what the Law of Demand, taken up next, relies on.