Monday, March 28, 2011

Factors Governing the Demand of a Commodity

There are several factors which determine the quantity of a commodity that is purchased by a consumer. They are as follows.

1. The price of the commodity: Payment of price involves sacrifice. No reasonable man will sacrifice more than what a thing is worth in terms of utility.
Suppose a man derives a utility worth $40 from a shirt. If the market price of the shirt is more than $40, he will not purchase any. We know that consumers always behave rationally. If the price is $40, he may purchase one. For the second shirt, his utility will be less than $40. He will never purchase two shirts at $40 each. But if the price falls to $30, he may purchase a second shirt. Thus at any particular price, there is a definite quantity of the commodity which the consumer will purchase. The amount of such purchase is determined by the utility received, in comparison with the sacrifice involved. Sacrifice includes sacrifice of liquidity in terms of parting with cash. When the price falls, the sacrifice becomes less, and more will be purchased. When the price rises, the sacrifice increases, and less will be purchased.

2. The income of the consumer: The ability to buy a commodity depends upon the income of the consumer. The higher the income, the less will be the utility derived from the last dollar spent, i.e. less will be the marginal utility of money. A rich man can afford to pay more for what he buys.

When the income of a man increases, his ability to pay increases. He usually buys in large quantities, the goods and services he used to buy formerly, thereby enjoying the economies of scale. He may start buying certain new items. But he may buy less of certain goods when his income increases. He may buy less carbohydrate food and more protein food. The goods which are purchased less when income increases, are called inferior goods.

Decrease in income has the opposite effect. Less goods and services will be purchased. But the purchase of inferior goods may increase.

Thus change in income changes the pattern of consumption, and hence the quality of goods purchased changes.

3. The prices of substitutes and complements: The demand for a commodity changes in the same direction as the price of its substitutes. If the price of coffee falls, the demand for tea will also fall. People will buy more coffee and less tea. This explains the reduced demand for tea.
The demand for a commodity changes in the opposite direction to the prices of its complements. If the prices of computers fall, the demand for internet connections will increase. More people will buy computers, and hence more internet connections will be needed or demanded.

4. The taste and preferences of the consumer: This is the most important factor. How much of a commodity a man buys depends on how intensely he desires it. This also determines how he distributes his income among his different purchases.

5. Habit and imitation: Consumption is determined partly by habit and partly by imitation. A man wants those goods and services with which he has become familiar with long use (i.e. habit). An individual tries to climb upwards in the social scale. He thus always tries or wants to imitate the habits of those people who are socially superior to him. This habit of imitation is called the Demonstration Effect.

A few words about demand schedule: At different prices, the consumer buys different quantities of an article. The demand schedule for a commodity gives different sets of prices at which different amounts of a commodity can be sold. In other words, a list showing the quantities that will be purchased by a consumer at different prices, is called his individual demand schedule.

Just for a change trying to refresh my memory with what I had learnt as a part of my education curriculum during the 80s.

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