Different Factors Which Affects Demand - Essay Example

Business units while arriving at a business decision look to evaluate the different factors affecting demand and supply and take decision based on it. Evaluating the demand and supply helps to understand the market better and ensures that the planning process ensures efficiency. Changes in demand and supply happen due to various factors which the businesses have to identify. The paper looks into the different factors which affects demand. It also presents the reason for shift in the demand curve and compares it with the movement in the demand curve. Some of the important terminologies which will help to understand the paper better are presented below Demand: is the quantity of goods people are willing to buy at a certain price (Harris, 2011) Supply: is the quantity of goods supplied by the suppliers at a certain price (Harris, 2011) Demand Curve: represents the different quantity of goods customers are willing to purchase at different prices. Having a graphical representation of the quantity demanded at different prices help to find the demand curve (Harris, 2011) The demand curve establishes an inverse relationship between supply and demand whereas supply curve has a positive relationship (Supply, 2010). This helps to determine the equilibrium price and quantity as shown below Figure 1: Demand & Supply The above graph shows that demand and supply is determined by the intersection of the supply and demand curve. The above chart also shows that more supply than quantity demanded results in surplus and more demand than supply results in shortage (Supply, 2010). Various factors bring a change in equilibrium and one of them is the change in demand. The change in demand could be either due to price which results in movement along the same curve or changes in other factors which could result in the movement of the demand curve (Mankiw, 2003). This helps to identify the fact the demand curve moves along the same curve when there is a change in price. An increase in price results in the decrease in demand as a rise in prices makes certain section of the consumer to give up demand. This makes the demand curve to appear as follows The above graph represents that a rise in price from 6 to 9 decreases the demand of the product from Q1 to Q2. This shows that the changes in demand happen along the same demand curve as represented by the arrow on the demand line (Mankiw, 2003). A decrease in price looks as follows The above graph shows that the decrease in price from 12 to 9 results in an increase in demand from Q1 to Q2. This is also shown by the arrow on the demand line which highlights movement along the demand curve (Mankiw, 2003). An interesting thing to note here is that the rise and fall in demand depends upon the elasticity of demand. This has been substantiated by a study which states that price elasticity of demand helps to identify the changes in quantity demanded due to change in price (Levin & Wright, 2006) Movement along the same demand curve happens when others factors which has a bearing on demand doesn’t change. This is hardly a reality as other factors have an important bearing on demand helps to identify the fact that shift in the demand curve happens due to this. While ensuring a shift in demand curve price remains the same and other factors have a bearing on the change in demand. The shift in the demand curve due to factors which increases demand looks as follows The above graph shows that factors other than price cause a shift in demand curve. It is seen that the demand curve moves from Qd1 to Qd2 thereby bringing a change in demand and price. The shift in the demand curve due to factors which decreases demand looks as follows The above graph shows that factors other than prices decreases demand from Qd1 to Qd2 resulting in a change in demand and price. A study in this direction supports the fact that shift in the demand and supply curve occurs due to change in variable than the price variables. The amount of movement further depends on the elasticity of both demand and supply (Graves & Sexton, 2006). This thus helps to show that shift in demand happens due to other variables compared to price. Another study on similar line shows that shifts in the demand curve to the right is a shift upward whereas shifts in the demand curve to the left is a shift downward which happens in changes in variables other than price (Hartkemeier, 2005). This helps to identify the following factors which causes a shift in the demand curve Change in Income: has a bearing on quantity demanded. If the income increases then more quantity is demanded and vice versa (Demand, 2011). For example a rise in income increases consumption of consumer durables. This helps to establish an inverse relationship but there are situations when the changes in income have a different effect on demand. The cases when it happens are as follows In case of normal goods a rise in income increases demand but in case of inferior goods the result is opposite. This means that a rise in income increases the decreases the demand for goods. An example of inferior good is barley Change in price of other goods: has an effect on the demand of a commodity. The change in demand differs for different type of goods. Goods can be categorized into substitute and complimentary goods. In case of substitute goods an increase in price of a commodity increases demand of other commodity (Demand, 2011). For example increase in price of tea will increase in demand for coffee. This is due to the fact that one good can be substituted for others. In case of complimentary goods the result is opposite i.e. an increase in price decreases the demand for other goods (Demand, 2011). For example, a rise in price of bread reduces the demand for butter as both the goods are used together. Change in population: has a bearing on demand. An increase in population increases the demand as more people demand goods and vice versa. (Demand, 2011) For example, an increase in population will increase the demand for houses. In this situation prices remain the same and other factors has a role to play. Change in Climate: has a bearing on the demand. When there is a change in climate the goods suited for that situation increase and others fall 9 Demand, 2011). For example, when rainy season approaches the demand for umbrellas increases but during the winters the demand for umbrella falls. Change in future expectation: has a bearing on demand as changes in the perception about the future bring a change in demand (Demand, 2011). For example when consumer expects the price of a product to rise in the future then the consumption of a product increases at that point as people start to store commodities for the future. Change in taste: brings about a change in demand. When consumers preference and taste towards a product increases then the demand and price of that product increases (Demand, 2011). For example, when the customer taste and preference towards iPods increases it helps to increase the demand for that particular product. Thus, there are various factors other than prices which results in the demand curve to shift either outwards or inwards. Businesses need to identify this factors which helps to improve the efficiency of the business process. This increases the role of marketers as they have to identify any factors which can bring a change in demand and need to provide the management with the information so that the required changes can be made so that production is under control. The paper thus highlights various factors which affect demand by demarcating the differences that exist between shift in demand and movement along the demand curve. It also presents the different factors which has a bearing on demand curve and stresses the importance of identifying the factors to be able to plan better and improve the overall efficiency in the management process. References Demand. Factors Affecting Demand. 2011. Retrieved on March 30, 2011 from http://www.econport.org/content/handbook/Demand/Factors.html Graves, P. & Sexton, R. Demand & supply Curves: Rotation versus shifts. Atlantic Economic Journal, Volume 34, issue 3, pp. 361-364, 2006 Harris, B. What is supply & demand? 2011. Retrieved on March 30, 2011 from http://www.wisegeek.com/what-is-supply-and-demand.htm Hartkemeier, H. Notes on Shift in demand & supply curve. Journal on Economics, Volume 3, Number 4, pp. 31-56, 2005 Levin, E. & Wright, R. Downward sloping demand curve for stocks. Studies for Economics & Finance, Volume 23, Issue 1, pp. 51-75, 2006 Mankiw, N. Principle of Microeconomics. 3rd edition, South Western College Publications, 2003 Supply. Supply & Demand. Internet Center for Management & Business Administration. 2010. Retrieved on March 30, 2011 from http://www.netmba.com/econ/micro/supply-demand/ Read More