Eight Factors Responsible for Variation in Demand!

Demand: Affordability and willingness of a customer to buy a product or service at a given price are called demand in economics.

Price: Price of a product is inversely proportional to the demand, as the price rises automatically demand the product decreases and price decreases automatically demand of the product increases.

Expectations of price hike: If there is any possibility of a price hike in the future, then present demand increases automatically.

Income: If the income of consumer increases demand also increase as people can consume the number of products or services they want.

Taste, habit and fashion: Consumer's taste, habit and fashion are the key parameters of demand for any goods.

Climate: Climate plays a vital role in demand for certain goods in specific areas.

Complementary goods: Demand of a commodity can be impacted by complimentary goods.

Advertisement: It always attracts people to buy any goods.

Government taxes: Taxes plays a vital role in price, and the price is the key factor of demand for any product.

Four Principles of Individual Decision Making

Principles of Individual Decision-making

In life, we have to make a decision just about everything that we do. These decisions affect our daily lives and they sometimes they affect the lives of those around us. When making these decisions there are make factors that go into making a final one. In economics there are four principles that effect how a person makes a decision.

List of four principles of individual decision making.

• People face trade-offs.
• The cost of something is what you give up to get it.
• Rational people think at the margin.
• People respond to incentives.

These four principles play an important role in economics. This paper will define each individual principle and then give the rater an insight on a personal decision of the author using the aforementioned principles.

People face trade-offs.

Making a trade-offs is basically, choosing one thing over another. As modern technology advances, one could argue that society has traded-offs battery life in personal electronics for a smaller size and weight of the individual device.

The Cost is What You Give Up

After you have looked at what is being traded-offs, then you can determine the true value of your decision by what you are giving up for it. As in the previous example of personal electronics, giving up battery life has a serious downside in that the personal electronic device will have to charge. Here the cost can be a great one to a person that is constantly on the go.

Rational people think at the margin

Being rational means that an individual will do all that they can to achieve their goal with all that they have available to them. A rational personal thinking at the margin or on the edge will be able to make decisions that allow them to achieve their goal without giving up to much in overall cost. Going back to the personal electronic device, an individual could choose to go with the smaller and more lightweight device because of its portability, but they’ll bring along a portable charging device also, or use the product more sparingly to make the most of the available battery power.

People respond to incentives

An incentive can be carried to something positive like a benefit or something negative like a consequence. Incentives can be a large part of an individual decision making process. The incentive that an individual would most likely respond to when choosing the new personal electronic device would be that they are carrying around less weights, therefore making them more mobile. The consequence side that would affect the decision would be rooted in the fact they will not be able to use the device as much as they would like.

Conclusion

In an economy there are four principle that are vital to the decision making process of how it will distributes its resources. The first is Trade-offs, giving up one thing for another. Then the determination of the cost of what you are giving up to get to your goal. Third, is the thought that rational people think at the margin, meaning one will take advantage of all opportunity to achieve one’s goals. Finally, the principle that people respond to incentives, assists in determining the quantity or price of a certain resource. These principles are also applied in individual decision-making, and the results can affect more than just an individual but an entire economy.

The Altering Power of Income on Consumer Demands

Like everyone else, you go to work every day, do your job, and collect your paycheck at the end of every month! However, one of the months you suddenly noticed that the salary paid to you is significantly higher than usual. You've been given a raise! Now, since your income has increased, aren't you capable of spending more on goods or services than usual? This is referred to as an Income Effect. In other words, how changes in income affect the consumer decisions of purchasing any goods or services and ultimately, affecting the Demand.

Change in Income Influences Consumer Demands

The income effect principle implies how a consumer spends money influenced by an increase or decrease in his income. An increase in income results in demand for more goods and services and thus spends more money. A decrease in income results in the exact opposite. Businesses are generally affected by the effect when incomes are lower, and consequently, less spending occurs. But this is not the case always. 

The income effect can have both positive as well as negative effect on a business! 

For instance: A small-scale business that specializes in the production of goods that are purchased when incomes have decreased, it might see a boom in profits. Examples of such businesses include discount stores and retailers who sell goods in bulk. 

 

REF: https://www.youtube.com/watch?v=J6qBu0LreAI&t=377s

 

An additional factor to consider is the Substitution Effect, which occurs when the price for a product changes and consumers have an incentive to consume more of the good with a relatively lower price and less of the good with a relatively higher price.

 

Here Price plays a crucial role! 

The typical response to an increase in prices is that buyers choose to consume less of the products at higher prices.

So, how the change in Prices relate to Income? 

For Example: Consider the price of milk goes down by Rs.20. Now, the decrease in the price of milk increases the amount of money left with you that is also known as free money. This means you can either buy more milk, or other products. While higher prices make buyers feel like they have less money on hand, and therefore, causes them to buy less. On the other hand, lower prices make buyers feel a little content and cause them to purchase more. 

Another very important thing to consider is the vast inequality in the distribution of income that also has a power over Market Demand.

 

Effect of Income Inequality on Demand 

Higher income inequality means that the incomes of the rich keep increasing and those of the poor keep decreasing, which affects the overall demand and consumption of a product.

However, it also depends on the product. If it is an essential commodity which is available without any constraints in supply then there may not be any change in demand. For Example, edible salt. It is an essential commodity and perhaps difficult to replace in our daily life. The demand for salt does not go up when the consumer income goes up. Also, a decreasing income does not cut consumption since the supply is enough at a very stable inflation-adjusted price. An effect on demand might happen only if there is a severe shortage of supply due to which prices go up significantly.

Therefore, Demand does significantly depend on Income. Higher income means the more purchasing power. Therefore, with the increase in income people can afford to buy more. This is why an increase in income has a positive effect on the demand for a good.