The factors on which demand depends are called the determinants of demand. We outline them below explicitly.
(i) Price of the product:
Other things remaining unchanged, more of a product is demanded at a lower price and vice versa. The relationship as portrayed in Figures 2.1 and 2.2 is commonly referred to as the ‘Law of Demand’. So long as the product is a normal one, the demand curve would slope downwards from left to right as shown in the figures.
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If the product is a ‘Giffen good’, the variation in its demand with its price is direct. That is, ‘other things remaining unchanged’, more of a Giffen product is demanded at a higher price and less at a lower price’.
These products, named after Prof. Giffen who observed the phenomenon, are essentially inferior. It was observed that demand for bread, generally considered inferior to other foods, shot up in response to a hike in its price.
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This rise in demand of bread led to a further hike in its price, which in turn, raised the demand for bread even further. The leverage effect might have been caused by panic buying of bread by people, fearing that bread so essential for them would perhaps disappear from the market and that they would have to do with costlier substitutes.
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Among other deviations from the law of demand is the conspicuous consumption also known as the ‘Veblen Effect’. The higher the price of the product, the higher its demand by some individuals. The phenomenon is also known as the demonstration effect. Some people buy more of the costlier commodities just to impress others.
(ii) Income of the consumers:
Other things remaining the same (ceteris paribus), more is demanded at a higher income and less at a lower income (Figure 2.4). Among the other things assumed to remain unchanged are—price of the product, prices of related goods, tastes, fashions, and preferences. If the product is an inferior one, less of it is demanded at higher incomes and more at lower incomes.
(iii) Prices of related goods:
Related goods referred to here are substitutes and complements. Other things remaining the same, more of a product A is demanded when price of product B, a substitute, rises. For instance, when price of tea in a local cafe rises, price of coffee remaining unchanged, demand for coffee goes up.
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The opposite is the effect on demand of coffee when price of tea falls, coffee price remaining unchanged. Figure 2.5 shows an upward rising curve for demand of coffee in response to a change in price of tea, coffee price remaining unchanged.
Likewise, we can analyse demand for complements. Let us take the example of petrol and car. When price of petrol rises, other things remaining unchanged, demand for cars falls. The same is the case with demand of ink-pens when price of ink goes up. The demand curve for a product slopes downwards in response to a change in the price of its complement, as shown in Figure 2.6.
(iv) Tastes, preferences, fashions:
Changes in tastes, preferences and fashions affect demand significantly. For instance, people from rural areas prefer lots of sugar in sweets, while urbanites prefer comparatively much less of it. Sweets with high sugar content command a low price while those with low sugar content, a high price.
Urban people opt for sweets with low sugar content despite a high price. Likewise, an old painting for an art-lover may be quite invaluable, but it means little to those who have no eye for art. Anything that disappears from the fashion scene suffers a fall in its price and also in demand at the same time.
On the contrary, goods that catches up with fashion gain in price and also in demand. It is, however, difficult to measure the abstract factors such as tastes, preferences, and fashions.
As a result, it is not possible to represent them on any measuring rod nor is it possible to establish any relationship in quantitative terms with other parameters. Thus, it is not possible to draw demand curves with such abstract things as independent variables.