Question

What is called "Demand"? Explain the major factors affecting it.

Hint:

To remember the factors, use the mnemonic PRICE: Price of related goods, Real income, Interests and tastes, Consumer expectations, and Expenditure (where Px, the price of the commodity itself, is the most direct factor).

Answer 1

Step 1: Meaning of Demand:
In economics, Demand refers to the quantity of a commodity that a consumer is willing and able to purchase at various possible prices during a given period of time. Demand is not just a mere desire; it must be backed by both the purchasing power (ability to buy) and the willingness to spend that money.

Step 2: Major Factors Affecting Demand (Determinants of Demand):
The demand for a commodity is influenced by several factors. The major ones are: \begin{enumerate} \item Price of the Commodity (Px): This is the most important factor. According to the Law of Demand, there is an inverse relationship between the price of a commodity and its quantity demanded, ceteris paribus. When the price falls, demand rises, and when the price rises, demand falls. \item Price of Related Goods (Pr): \begin{itemize} \item Substitute Goods: These are goods that can be used in place of each other (e.g., tea and coffee). An increase in the price of a substitute good leads to an increase in the demand for the given commodity (e.g., if the price of coffee rises, demand for tea will rise). \item Complementary Goods: These are goods that are used together to satisfy a want (e.g., car and petrol). An increase in the price of a complementary good leads to a decrease in the demand for the given commodity (e.g., if the price of petrol rises, the demand for cars may fall). \end{itemize} \item Income of the Consumer (Y): \begin{itemize} \item Normal Goods: For these goods, demand increases as consumer income increases. Most goods are normal goods. \item Inferior Goods: For these goods, demand decreases as consumer income increases. Consumers switch to better quality goods as their income rises. \end{itemize} \item Tastes and Preferences (T): The demand for a good is directly affected by the consumer's tastes, preferences, habits, and fashion. A favorable change in taste leads to an increase in demand. \item Expectations of Future Prices (E): If consumers expect the price of a commodity to rise in the future, they may increase their current demand to stock up. Conversely, if they expect a price fall, they may postpone their purchase, leading to a decrease in current demand. \end{enumerate}

Step 3: Final Answer:
Demand is the willingness and ability to buy a commodity at a given price. It is primarily affected by the commodity's own price, the price of related goods, consumer's income, tastes and preferences, and future price expectations.