Causes of Changes in Demand - Essay Example

Running Head: business markets Business markets [The of the appears here] [The of the appears here] Demand: The demand for any thing at a given price is the amount of it which will be bought per unit of time at that price. By analyzing the above definition we have calculated that the demand principally changes with the change in its price. The demand of house hold rise when the price of that good falls and the demand will fall when the price of the house hold rise, so there is an inverse relation between demand and the price of the good demanded. However there are other factors that will affect the demand of a house hold Causes of changes in demand: We spell out bellow some of the causes which bring about changes in demand and also analyze how demand will be affected by the following factors. Change in taste, preferences and fashion. We see that increasing habit of taking tea ahs decreased the demand for milk. Change in the mode of dress means a change in the demand for the material. The fashion among ladies to keep hair long or short brings about changes in demand for hair pins, hair nets, etc. Change in the real income. A distinction made between incomes i.e. the amount of money that a man earns, and real income which means the quantity of goods and the services which he can buy with that amount of money. In times of technical progress, there is a large output of cheap goods. The purchasing power of money increases or it may be said, real income increase. Less money will be needed to purchase the same quantity of goods and the saving of money will be utilized for the purchase of the other good. The demand schedule will have to be recast. Some goods may be eliminated from consumption and instead entirely new goods purchase; demand for some goods will decrease and that for others increase. Change in money supply. Where there is inflation the additional money will add to the purchasing power of the commodity, and the prices will rise but this rise in price is not uniform in case of all goods. People will have to readjust their expenditure: demand for certain things will be reduced and for other stimulated. Change in the level and distribution of income. Through the instrument of public finance for example by taxing the rich and spending the funds so obtained on the poor, wealth is redistributed. There is a transfer of spending power. This bound to affect demand. Demand for those goods will increases which are purchased by a class whose spending power has increased, and vice versa. The larger if the average household income, greater is the demand for the commodities they consume. Change in saving. Demand for goods is affected by a change in the household's propensity to save. Large saving means less money to purchase the goods. The demand will there for decrease. Change in asset preferences. It is quit obvious that if a consumer develops the marked liquidity preferences his demand for goods will decrease, because he prefers to keep with him ready cash instead of buying things. Change in Expectations or Anticipations. Expectation also brings a change in demand. If prices are expected to rise in future the demand for goods will increases now in the present. Similarly expectation of rising incomes will restrain current purchase and postpone purchases to a future favorable situation. Change in Conditions of trade. Demand for every thing is greater in boom even though the prices are rising. On the other hand in time s of depression there is a general slacking of demand. Change in Price of related goods. Substitutes In case of substitutes for example tea and coffee an increase in the consumption of one will lead to a decrease in the consumption of the other. When a decline in the price of one good results in the decline in the demand for another good they are substitutes. Or two goods are substitutes if the demand for one is directly related to the price if other. Complements In case of complements for example horse and carriage increases demand for one will augment for that of another. Two goods are complement if the price of one and the demand for other are inversely related. For instance, if the price of carriage falls, the demand for horse will rise. Other examples of complements are pipes and tobacco tennis rackets and tennis balls. Joint supply In case of joint supply for example wheat and straw the increased demand for one will lead to cheapening of the other, and may, there fore stimulated its demand too after some time. Joint demand When there is a case of joint demand the increase in demand for the ultimate object, for example the house will increase the demand for every thing that is needed to build the house. Composite demand In case of composite demand for example water required for drinking washing bathing etc. any extension or contraction of its uses will correspondingly change the demand. Composite supply In case of composite supply for example light obtained from electricity gas or kerosene, cheapening of any one of them will reduce the demand for the other. Change in Climate or weather. It is obvious that demand for a commodity must change with the change in season. In winter there is a greater demand for warm clothing. For certain type of tonics and for coal and fuel. In summer, there is a great demand for the electric fans, room coolers and cooling drinks, ice etc. Change in size and composition of population. If for instance the common wealth countries and America allow a free entry to Indians, we can expect immigration from India. If Indians stick there own mode of living in food and dress in their new homes, demand for such things will be created there. It is not merely a change in the size of the consuming population but change in the composition of population, too, which affects the demand for certain commodities and services. In a country of increasing population, like India where multiple of thousands of children born every day, there will naturally is demand for toys, feeding bottles and nipples etc. Thus the demand for a commodity does not depend only at its price but the prices of other goods too. The limited supply of money that a consumer has is to be allocated among goods that he has to purchase. Hence, the demands and prices of all goods are interrelated. A big price hike in certain commodities is bound to affect the demand for other goods that a consumer has to purchase. These are some factors which tend to influence the demand. Capitalism: There is hardly any country today which can be called a pure free enterprise or capitalistic economy. Even the economies of USA and UK which are called capitalistic economies are example of mixed economies. But basically, they are still free market or capitalistic economies, because even now major role in their economies is played by private enterprise and capital. The economic development of the USA UK and western European countries took place under capitalism or under the system of free enterprise. Merits of capitalism The capitalism has survived for centuries and is still going strong show that the system must have certain inheriting merits. We may note below the main merits. Automatic working One merit of capitalism is that it does not require any central directing authority for its better functioning. It functions automatically through the price mechanism. If at any time, there is some disturbance in the economy, it is rectified through price change. Higher efficiency and incentive to hard work Another merit of capitalism is that under capitalism workers and entrepreneur are encourage improving their efficiency input and hard work. Entrepreneur is induced to work hard and work more efficiently to earn higher profits. Since the more efficient and hard working labor can earn higher wages, they have the incentives to improve their efficiency. Hence under capitalism he entire man power resources of the country work the hardest and most efficiently. In this way the national output increases in an economic development is accelerated. Higher rate of capital formation As we have already mentioned, people under capitalism have the right to hold property and pass it on in inheritance to their heirs and successors. Owing to this right people save a part of their income so that it can be invested to earn more income and leaves larger property of theirs heirs. The rate of capital formation increases when savings are invested. This accelerates economic growth. Economic development in prosperity The supporters of capitalism point to the rich variety and abandoned the supply of goods and services. The lure of profit compels the entrepreneur to take risk and to conquer new fields in production. Slandered of living has risen all-round comfort of life has increased, and life has become richer and fuller. This is the service rendered by capitalism to society. As we have already said, capitalism offers great incentive for saving and large opportunities for investment. It encourages innovation and technological progress and the optimum use of resources it is those conducive to economic growth and prosperity. Optimum utilization of resources The limited resources of the community are put to the most economical use with as little waste as possible. There is keen competition among producers and entrepreneurs to produce and sell goods. Every producer and entrepreneur tries to use the productive resources at his disposal in the most economical manner in order to make maximum profit. The person responsible for the waste receives prompt punishment for his miscalculation in the form losses or bankruptcy. In this way capitalism encourages the most efficient use of the resources of the country. Encouragement to enterprise and risk taking Important merit capitalism lies in this that it encourages the entrepreneur to take risks and adopt bold policies, because in this way they can make higher profits. Higher the risk greater is the profit. They also make innovation in order to cut their cost and maximize their profits. These innovations results in the improvement of production techniques and lowering of the cost of production. Hence capitalism brings about a great technological progress in the country. Democratic The consumer's control gives the system a democratic tinge. No body likes that his consumption should be dictated by some superior authority. In the capitalist economy, attempt is made to adjust production to the consumer wishes. They consume what they like and not what is supplied to them. That is the consumers control production. The consumers constitute the general public; hence, the system is democratic Demerits or criticism of capitalism: But capitalism is now being assailed from all directions. The following are the main grounds on which it is attacked: Wasteful competition Competition, whish is the cardinal feature of capitalist economy, is a sheer waste. Colossal expenditure incurred on advertisement and salesmanship simply to defect arrival. Resources employed by those who are defected in the race, go to waste. Cut throat competition does not confer any corresponding social benefits, through it many be advantageous to the firms concerned. Competition result in the production of too many varieties. A reasonable variety is all right because it offers alternatives to consumers but too much variety is wasteful. There is no doubt that the efficiency of the capitalistic system depends on the existence of free competition and the mobility of the factors of production. But the existence of friction, legal and economic, hampers free competition with the result that factors of production also lie idle. Human welfare ignored The supposed harmony between the interests of the consumer's i.e. the society, and those of the producers, does not actually exists. Lack of free competition, deliberate deceit practiced by unscrupulous producers and the ignorance and the importance of the individual consumer turn the consumer the king in to the abject slave, a victim of exploitation. The economic decision made by individual entrepreneur and producer under capitalism are based on their self interest and not from the point of view of good of society. The producer produced those commodities and in such qualities that the difference between price and cost is the maximum so that their profit is maximized. However necessary and useful the commodity may be the producer will not produce it if price does not exceed the cost, because it is only the profit motive which derives them. Social welfare is ignored altogether. Emergence of monopolies and concentration economic power It also happen under capitalism the perfect and free competition ceases to prevail and instead big combination s of power full producers and monopolies emerge against whom it become difficult for an ordinary entrepreneur to compete. These big monopolies come to control the market on account of the huge resources that they command and small producers are squeezed out. Thus, under capitalism free enterprise is merely nominal; it is not free enterprise for all. Actually, only those entrepreneurs are able to under take business who commands large resources. The monopolies produce small quantity but charge high prices and thus exploit the consumer. Also the big businesses control many types of businesses and industrial concerns at the same time. Hence there is a lot of concentration of economic power in few hands the concentration of economic power is the major defect of capitalism. Misallocation of resources Capitalism is also criticized on the base of misallocation of the productive resources of the country. Production under capitalism is not under taken merely to satisfy the basic needs of the masses of the people. The productive resources are utilized for the production of luxuries for the rich without producing sufficient quantity of goods for the mass consumption. It is true under capitalism production is carries on according to the wishes of the consumers. But since there is a great inequality in the income and wealth and demands depends on the purchasing power of the people, the rich people are able to exert greater pull in the product market. Malpractices In recent years, the image of capitalism has been tarnished by sharp practices indulge by business man industrialists. Such practice includes case of Enron and World com where the companies are filed for bankruptcies. Class conflict Capitalism has shown the seed of eternal social unrest by dividing the society into two hostile camps of capital and labor, the "have and have not" Conclusion These few points constitute a sufficient indictment on the present system in the US. People now proudly put forward their progressive views in capitalist countries. As an escape from the intolerable conditions prevalent under capitalism, the chief suggestion is planned capitalism and communism. Reference: Vivek Suneja; Understanding Business Markets John Sloman (1999). Economics: factors of demand. 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