Determinants of individual demand

The determinants of individual demand of a particular good, service or commodity refer to all the factors that determine the quantity demanded of an individual or household for the particular commodity. The main determinants of demand are:

1. The (unit) price of the commodity.

2. The tastes and preferences of the individual or household.

3. The prices and nature of substitute goods, i.e., goods whose consumption can replace the consumption of the given good. The cheaper and better the substitute goods, the less the demand, ceteris paribus. This is termed the substitution effect.

4. The prices and nature of complementary goods, i.e., goods for which increased consumption makes the consumption of the given good more worthwhile. A drop in the price of complementary goods leads to an increase in demand, ceteris paribus.

5. The disposable income that the household has. More specifically, the fraction of household income that it is generally willing to spend on that or related commodities. An increase in income leads to an increase (or at any rate, no decrease) in demand for most goods. This is termed the income effect. Goods for which the income effect is reversed are typically inferior goods. For these good, demand may drop with a rise in income.

6. Expectations of future prices. This is particularly important for durable goods for which there is no urgency to purchase. In general, if future prices are expected to be lower, demand is less for a given price, because a person decides to delay the purchase. If future prices are expected to be higher, demand may be higher for a given price, because a person prefers to buy now before the good becomes too expensive.

7. The surrounding circumstances, such as climate, weather, crime levels, that have an effect on the desirability of possessing the good. This is sometimes folded under tastes and preferences -- however, surrounding circumstances could change without any change in tastes and preferences.

The demand curve (specifically, the individual demand curve) is a plot with quantity demanded on the horizontal axis and price on the vertical axis, keeping all other parameters constant (i.e.,ceteris paribus).

Determinants of market demand

The market demand curve for a commodity is obtained by adding up the individual demand curves for all economic actors in the market. Thus, each of the determinants of individual demand is also a determinant of market demand. However, aggregating a particular determinant of individual demand across the market (through some method such as taking an average) does not necessarily capture all the information about that determinant since the distribution across the market also matters. Broadly, there are three kinds of factors that affect market demand:

1. The size of the market. ceteris paribus, a larger market means more demand, and a more outward market demand curve.

2. The various determinants of individual demand, averaged across all economic actors in the market.

3. The distribution of each of the determinants of individual demand across all economic actors in the market.

Determinants of change in demand

Effect of unit price

Unit price has a direct effect on the quantity demanded but not on the demand curve (which is a plot of quantity demanded against individual price). The relationship is studied by studying thedemand curve. The most important feature of this relationship is the law of demand, which asserts that an increase in unit price leads to a decrease in quantity demanded.

Other determinants

The cause of a change in quantity demanded, either at the individual or market level, is usually a change in one of the determinants of demand. Given below is a comprehensive table of examples:

Determinant of demand	Individual or market?	Nature of change	*Effect on quantity demanded ceteris paribusand hence on demand curve*	Measure of sensitivity
Tastes and preferences	individual	increase in preference	positive, hence expansion of demand curve
Tastes and preferences	individual	decrease in preference	negative, hence contraction of demand curve
Price of substitute good	individual	increase in price	positive, hence expansion of demand curve	see cross-price elasticity of demand, also substitution effect
Price of substitute good	individual	decrease in price	negative, hence contraction of demand curve	see cross-price elasticity of demand, also substitution effect
Nature of substitute good	individual	better substitution	ambiguous. Demand could shift between the two substitutes depending on the relative prices.
Nature of substitute good	individual	worse substitution	ambiguous. Demand could shift between the two substitutes depending on the relative prices.
Price of complementary good	individual	increase in price	negative, hence contraction of demand curve	see cross-price elasticity of demand
Price of complementary good	individual	decrease in price	positive, hence expansion of demand curve	see cross-price elasticity of demand
Nature of complementary good	individual	increase in complementarity	positive (generally), hence expansion of demand curve
Disposable income	individual	increase in income	positive (usually), hence expansion of demand curve	see Engel curve and income-elasticity of demand. Goods for which this is true are termed normal goods. Exceptions are termed inferior goods.
Disposable income	individual	decrease in income	negative (usually), hence contraction of demand curve	see Engel curve and income-elasticity of demand. Goods for which this is true are termed normal goods. Exceptions are termed inferior goods.
Expectations of future prices	individual	increase in future price expectation	positive, hence expansion of demand curve
Expectation of future prices	individual	decrease in future price expectation	negative, hence contraction of demand curve
Environmental need for good	individual	increase in environmental need	positive, hence expansion of demand curve
Environmental need for good	individual	decrease in environmental need	negative, hence contraction of demand curve
Market size	market	increase in market size	positive, hence expansion of demand curve

Types of Demand:

Marketing management has the task of influencing the level, timings and composition of demand in a way that will help the organization to achieve its objectives. Also, A marketer has to take into consideration different types of demand for his product before he comes up with a strategy.

1 ] Negative Demand

The market is in a state of negative demand if; a major part of the market dislikes the product and may even pay a price to avoid it.
Eg: People have a negative demand for

· Vaccination

· Dental work

· Vasectomies

· Gall bladder operation Employers feel a negative demand for

· Ex-convicts

· Alcoholics

The marketing task is to analyse, why the market dislikes the products?

2] No Demands
Target consumers may be uninterested in the product. Ex – People have no demand for

· Farmers may not be interested in new farming methods

· College students may not be interested in a foreign language course.

The marketing task is to find ways to connect the benefits of the products to the person's natural needs and interests.

3] Latent Demand:
Many consumers may share a strong need that cannot be satisfied by any existing products.

· Latent demand for harmless cigarettes.

· Safer neighborhood.

· More fuel efficient cars.

The marketing task is to measure the size of the potential market and develop effective goods and services that would satisfy the demand.

4] Declining Demand
A substantial drop in the demand for products.

· Boy scout enrolment among Singapore students.

The marketing task is to:

1. Analyse the cause of market decline.

2. Determine whether the demand can be re-stimulated by changing target markets, changing product features and developing more effective goods.

3. To reverse the declining demand through creative remarketing of the product.

5] Irregular Demand
Organizations face demand that varies on a seasonal, daily or even hourly basis, causing problems of idle capacity or overcrowded capacity.

· Markets :- visited on weekends, not on weekdays.

· Hospitals :- OT's booked for early weak

The marketing task is called Synchro Marketing (alter pricing, promotion & other incentives)

6] Full Demand
Organizations face full demand when they are pleased with there volume of business.

The marketing task is to:

1. Maintain the current level of demand in the face of changing consumer preferences and increasing competition.

2. Quality should be improved.

3. Continuously measure consumer satisfaction.

Eg: Maruti at the time of bookings made open.

7] Overfull Demands
Some organizations face a demand level that is higher then they can or want to handle. Marketing task is De-marketing which requires finding ways to reduce the demand temporarily or permanently.

Steps involved in de-marketing:

1. Raising prices.

2. Reducing promotion and service.

3. Selective de-marketing(less profitable markets)

Eg: Quota system for new car registration by a fixed percentage annually.
8] Unwholesome Demand
Unwholesome products will attract organized effort to discourage their consumption. Un-selling campaigns have been conducted against cigarettes, alcohols, hard drugs, handguns and pirated movies.