A graphical illustration which shows the effectual relationship between the price of a commodity and its quantity is known as a demand curve. Every manager refers to a demand curve as it is significant in making business decisions.
There are various factors from the external environment which affects a demand curve. The factors lead to shifting of the curve either to the left or right side.
The demand curve is mainly affected by the five factors- income of the consumer, prices of related goods, taste & preferences and population.
1. Income of the consumer
It is one of the vital determinants of demand. As the consumers’ income increases, they demand more of superior goods rather than inferior goods.
Inferior goods are those that witness a decrease in their demand as the income of consumers increase. It is known to have a converse relationship with demand. For instance, people of lower income group who cannot afford to purchase a vehicle or pay taxi fare prefer traveling through public transport. But, as their income would increase, they’d prefer personal vehicle.
Normal or superior goods are those goods whose demand increases with an increase in the income of consumers. It has a direct relationship with the demand. For instance, as the income of the consumer increases, they can afford to buy a car and travel by it.
2. Prices of related goods
Related goods are divided into two categories:
Substitute Goods
These are the goods which can be used in the place of one another. Under substitute goods, a decline in the price of one good leads to the decrease in the demand of other. One of the well-known combinations of a substitute good is tea and coffee. The decrease in the price of tea will lead to a decrease in the demand for coffee. So, people will start shifting towards tea and consume less coffee.
Complementary Goods
The goods which are consumed together are called complementary goods. Under this category, an increase in the price of one good will lead to a decrease in the demand of other good. For instance, an increase in the price of petrol will lead to a decrease in the demand for petrol cars.
3. Size of the population
Size of the population affects the demand to the maximum. As the population increases, the demand for a certain product will also increase. If the birth rate is increasing in a country, the demand for baby products will automatically boost. On the other hand, if the death rate is increasing in the country, the demand for hospitals or medical services will increase.
4. Taste and preferences
The demand for a product is mainly dependent upon the taste and preference of the consumers. As a new product becomes a trend in the industry, people start preferring it and its demand rises but as its fashion leaves, its demand decreases.
So, these are the factors that affect the demand curve. Every manager must observe these factors so that he/she can identify the demands for a particular product. If you are looking to shape your career in the field of management, then pursue management courses from MIT School of Distance Education right away. These courses are better than distance MBAas their syllabi are updated regularly to sync with the ongoing industrial landscape.