- In a market economy, demand plays a critical role in shaping the production and pricing of goods and services.
- Understanding the determinants of demand can help businesses make informed decisions about how much to produce and at what price to sell their products.
Features of Demand:
- Demand refers to the willingness and ability of consumers to purchase goods and services.
- The following are the key features of demand:
- Quantity demanded: The amount of a product that consumers are willing and able to buy at a given price.
- Price: The cost of a product, which is one of the primary factors that affect consumer demand.
- Income: The level of income of consumers influences their ability to purchase goods and services.
- Taste and preferences: Consumers’ preferences and tastes for particular products can greatly affect their demand.
- Consumer expectations: Consumers’ expectations about future prices and economic conditions can impact their current demand for products.
Determinants of Demand:
- The determinants of demand are the factors that influence the demand for goods and services in a market economy.
- These determinants include:
- Income: As consumers’ income increases, their demand for most goods and services also increases. For example, if a consumer’s income increases, they may be more likely to purchase a luxury car.
- Price of related goods: The prices of related goods, such as substitutes and complements, can affect the demand for a particular product. For example, if the price of coffee increases, consumers may switch to tea as a substitute, reducing the demand for coffee.
- Taste and preferences: Consumer preferences and tastes for specific products can greatly affect demand. For example, if a new video game is released that consumers enjoy, demand for the game may increase.
- Consumer expectations: Consumer expectations about future prices, income, and economic conditions can impact their current demand for products. For example, if consumers expect a product to be discounted in the future, they may delay their purchase, reducing demand in the present.
- Population: The size and demographic makeup of the population can influence demand for products. For example, an increase in the number of children in a population may increase demand for children’s toys.