Factors affecting demand

From CEOpedia | Management online

Factors affecting demand are subject of study in macro-economics as well as marketing and strategic management. The amount of money which consumers have and plan to spend on goods or services influence global demand and business opportunities.

Determinants of demand

  • personal consumption expenditures,
  • private domestic investment (in housing, etc.),
  • business operational spending,
  • business investment spending,
  • government spending,
  • export.

Main factors affecting business demand

  • changes in prices (of commodities, raw materials, services),
  • prices of related or alternative goods and services,
  • costs of supply chain management (cost of transport, IT services, storage, etc.)
  • interest rate and investment climate (cost of credit, money supply),
  • government policy (promotion of some industries, promotion of exports),
  • laws and regulations (taxes, tariffs),
  • job market situation (average wages, employment regulations),
  • demographics, population growth in particular age or income group,
  • nature of the good produced (high priced, exclusive, or low priced, in common use),
Fig. 1. Relations between price and demand

Main factors affecting personal demand

  • changes in prices (usually lowering the prices of the product increase demand),
  • prices of complementary goods and services (complementary goods are used together, so change in price of related good, affect demand on other),
  • prices of substitute goods and services (people could choose substitute of good or service, which price is lower),
  • changes in disposable income due to change in wages or taxes (usually the higher income, the more products people want to buy, this rule does not apply to so called inferior goods, or Giffen goods),
  • attitudes towards saving for the future (influenced by fear of unemployment, etc.),
  • changes in tastes and preferences (influenced by fashion, peer pressure, media, celebrity endorsement, advertising, promotion),
  • changes in expectations (consumer predictions about future prices and income, rumours),
  • changes in product and service quality,
  • buildup of brand loyalty and groups of fans for particular product or company (ex. iPhone),
  • changes in the number of potential customers
  • changes in climate and weather patterns (hotter climate generate more demand for cold drinks, etc.),

Types of demand

  • negative demand - caused by misunderstanding of promotional or advertising activities, rumours spread by competitors, attitudes of consumers, etc.
  • no demand - caused by insufficient information about a good or service, indifference or lack of need for such product, no differentiation from competitive products,
  • latent demand - caused by a gap between needs and desires of consumers and actual product present on the market, there are no products that could satisfy those needs but they may appear in the future,
  • seasonal demand - dependent on time of year or day, consumers habits, regional demand patterns, holidays, etc.
  • declining demand - for products going out of the market, changing technology or activities of competitors,
  • irregular demand - there are no consistency in level of demand, it is influenced by unknown factors,
  • overfull demand - demand is greater than production capacity of suppliers, often happens in controlled economies.

Examples of Factors affecting demand

  1. Price: The price of a product or service will affect the demand for it. If the price is high, fewer people will be willing to buy the product. If the price is low, more people will be willing to buy the product. For example, if the price of a laptop increases, fewer people will buy the laptop and vice versa.
  2. Income: The amount of money that people have to spend on goods or services will influence the demand. If people have more money to spend, they will be more likely to purchase goods and services. Conversely, if people have less money to spend, they will be less likely to purchase goods and services. For example, if people’s incomes increase, they will be more likely to purchase luxury goods such as cars or vacations.
  3. Tastes and Preferences: People’s tastes and preferences can influence the demand for certain products or services. For example, if people’s tastes shift away from a certain type of clothing, demand for that type of clothing will decrease.
  4. Population: The population of a given area will affect what people demand. If the population increases, it is likely that there will be an increase in demand for goods and services in that area. For example, if a city’s population grows, demand for housing and other goods and services in that city will likely increase.
  5. Advertising: Advertising can have a major impact on what people demand. Advertising can influence people’s tastes and preferences and can also create demand for products or services that people may not have been aware of before. For example, if a company advertises a new product, it can create demand for that product.

Advantages of Factors affecting demand

The factors affecting demand play an important role in understanding the fundamental economic principles and their implications for businesses. Understanding the factors influencing demand can help businesses to plan better, optimize resources and maximize profits. The advantages of factors affecting demand include:

  • Increased understanding of customer needs: Analyzing the factors that affect demand can help businesses to better understand customer needs and preferences. This helps them to offer products and services that meet customer demands.
  • Improved pricing strategies: Factors affecting demand can help businesses to create better pricing strategies. Businesses can use demand factors to accurately identify the right price point for their products or services.
  • Optimized resource utilization: Knowing the factors affecting demand can help businesses to optimize their resources. Businesses can plan their production process to ensure that they use their resources efficiently and produce goods or services that meet customer needs.
  • More informed decisions: Analyzing the factors affecting demand can help businesses to make informed decisions. Businesses can use demand factors to identify trends in customer buying behavior and plan for the future accordingly.

Limitations of Factors affecting demand

  • Economic conditions: Economic conditions, such as inflation, unemployment and disposable income, can drastically affect consumer demand. For example, when unemployment is high or wages are low, consumers may be less likely to purchase goods and services.
  • Government policies: Government policies, such as taxation, subsidies and trade restrictions, can impact demand. For example, if taxes are increased on certain products, consumers may be less likely to purchase them.
  • Consumer confidence: Consumer confidence can also have an impact on demand. When consumers feel secure about their job prospects, income and the economy in general, they are more likely to purchase items. On the other hand, if consumers feel uncertain, they may be less likely to spend.
  • Availability of resources: The availability of resources, such as land, labor and technology, affects the production of goods and services. When resources are scarce, production may be limited and demand may be impacted.
  • Competition: The presence of competitors in the market can also influence demand. If there is a lot of competition among sellers, prices may decrease and demand may increase. On the other hand, if there is little competition, prices may be high and demand may decrease.
  • Price: The price of goods and services also affects demand. Generally, when prices are high, demand is low. On the other hand, when prices are low, demand is likely to increase.
  • Advertising: Advertising can also have an impact on demand. If a company advertises its products or services effectively, it can increase demand. On the other hand, if the advertising is ineffective, demand may be limited.

Other approaches related to Factors affecting demand

One of the core approaches to study factors affecting demand is macro-economics, but there are many other elements involved in the analysis. These include:

  • Marketing and Strategic Management - Understanding consumer behaviour and preferences, market trends and demographics, as well as strategic decisions and investments, are vital to assessing and predicting demand.
  • Social factors - Trends and fads, changes in social values, and the influence of social media and advertising are just some of the social factors that can affect demand.
  • Political and legal forces - Laws and regulations, taxation, and international trade agreements are all important elements in assessing the demand for goods and services across different markets.
  • Environmental and technological factors - Technological advancements, climate change, and natural disasters can all affect the demand for certain goods and services.
  • Psychological factors - Consumer preferences and expectations, as well as their perceptions of price, quality, and availability, are all psychological factors that can affect demand.

In summary, various macro-economic, social, political, legal, environmental, technological, and psychological factors can all influence demand for goods and services, and it is important for companies and governments to consider these elements when assessing global demand and business opportunities.

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Author: Krzysztof Wozniak