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Business firms want to increase demand so that they can increase profits.
Governments and central banks boost demand to end economic recessions.
In the real world, many factors impact the buying decision of consumers.
Some important determining factors of demand are given below:
Demand is inversely related to price of complementary goods.
The goods which are consumed together to fulfill a single need like brick and cement, pen and ink are called complementary goods.
If price of complementary goods rises demand for the commodity decreases and vice versa.
Demand is directly related to price of substitutes.
The goods among which we choose one to fulfill our need are called substitutes.
They are alternative of and competitive to each other like Coke and Pepsi.
If prices of substitutes rise, demand increases and vice versa.
Demand for normal goods is directly related to income of consumer.
If income increases, demand also increases and vice versa.
But demand for inferior goods is inversely related to income of the consumer.
Demand is directly related to population and number of consumer.
If population increases demand also increases and vice versa.
If taste and preference of consumer change in favor of goods, demand increases.
Single taste and low preferred goods by the consumer has low demand.
If government imposes more taxes, the price of goods and services increase; as a result the demand decreases and vice versa.
Demand is directly related to the advertisement expenditure.
More and attractive advertisement of goods causes to be more demand and vice versa.
Demand is inversely related to interest rate.
If interest rate raises people save more, deposit in banks or lend to earn interest increases.
Due to this reason demand decreases and vice versa.
The demand depends upon the nature of commodities too.
The demand for basic goods is relatively inelastic.
But demand for luxurious goods usually is elastic.
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Consumer wants to buy a product but backed by his purchasing power and willingness due to price.
The law of demand indicates that there is an inverse proportional relationship between price and demand of goods.
When the price of goods increases, its demand decreases and vice versa.
The causes of downward sloping demand curve are due to following reasons:
According to Gossen, if a consumer goes on consuming more units of same commodity without time gap, marginal utility diminishes.
It means successive units of the goods gives less utility or satisfaction than previous unit of the goods.
Therefore, the consumer demands more only if prices are reduced.
If price of the goods is decreased, the real income of the consumer increases even if the monetary income constant.
Therefore, consumers demand increases.
If the price increases, real income decreases even if money income is constant.
Therefore, consumers demand decrease.
If a commodity becomes cheaper the commodity is substituted for other substituting goods.
If the commodity becomes expensive, it is substituted by other substitutes.
Therefore the demand increases at low price and vice versa.
If the price falls, the commodity is used for least important purposes too.
That’s why demand increases.
If price rises, the commodity is used only for important purposes.
That’s why demand decreases.
When price of goods decrease, people start to consume those goods that refused previously.
Hence, this shows inverse relationship between price and quantity demanded.
So, demand curve slopes downward from left to right.
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