Demand determinants

Demand

Demand is a schedule which shows the various amounts of a product consumers are willing and able to purchase at each price.

                  Economic analysis has recognized the role of key variables in determining demand and consumption. In practice, the distinction between demand (as a schedule of quantities as a function of price, other factors held constant) and consumption as an equilibrium quantity at a given price, is frequently ignored. The development of "gap" type models illustrate the common approach of projecting 'demand' as a fixed quantity independent of price.

                Demand, as the relationship between price and quantity, is subject to change over time due to changes in the underlying factors held constant by the static notion of demand. Changes in demand "shifters" are often included in economic estimation of demand representing anticipated dynamics in these determinants.

General determinates:

1. Price of product

We often find that a consumer buy a product when its price decline and vice versa

2. Incomes of consumers

A key determinant of demand is the level of income evident in the appropriate country or region under analysis. As a generality, the higher the level of aggregate and/or personal income the higher the demand for a typical commodity, including forest products. More of a good or service will be chosen at a given price where income is higher. Thus determinants of demand normally utilize some form of income measure, including Gross Domestic Product (GDP).

Superior goods or normal goods

·         As income increases, a superior good's demand increases

·         As income decreases, a superior good's demand decreases

·         Superior goods are most common goods

Inferior Goods

·         As income increases, an inferior good's demand decreases

·         As income decreases, an inferior good's demand increases

3. prices of related goods

Consumption choices related to timber are also influenced by the alternative options facing users in the relevant marketplace. The availability of potential substitute products, and their prices, weigh heavily in determining the elasticity of demand, both in the short run (static) sense and over time (long run). Fuelwood, as a dominant use of timber in the Asia Pacific Region, reflects conditions of very limited options for energy sources at 'reasonable' prices. Rural low income or subsistence populations simply do not have 'options' regarding energy - they use wood or go without. Demand, at this basic level, in almost perfectly inelastic. The cost (if only implicit in terms of gathering time) does not materially affect consumption quantity.

Suitability of alternative goods and services is, in part, a question of knowledge as well as availability. Market information regarding alternative products, quality, convenience, and dependability all influence choices. Under conditions of increased scarcity and rising prices for tropical hardwood panels, for example, users have a positive incentive to search for and investigate the suitability of alternatives that were previously overlooked or ignored.

Substitute Goods

·         As price of A increases, demand for B increases

·         As price of A decreases, demand for B decreases

·         Example: Nike's and Reeboks

Complementary Goods

·         As price of A increases, demand for B decreases

·         As price of B decreases, demand for A increases

·         Example: computers and computer games; gasoline and motor oil

Independent Goods

·         As price of good A changes, demand for good B does not change

4. Tastes and preferences

All markets are shaped by collective and individual tastes and preferences. These patterns are partly shaped by culture and partly implanted by information and knowledge of products and services (including the influence of advertising). Different societies use forest products differently because of these differences in taste and preferences. For example, markets for wood products in Japan are commonly recognized as requiring very high product quality standards, the importance of visual attributes of wood, and other preferences not commonly found in many other markets.

Additional factors related to luxury goods:

Consumer expectations of future income:

Your expectations in the future are also likely to affect the demand for a particular good or service right now. For example, if you are expecting to earn a lot of money in the near future then you will most likely be more inclined to spend today. On the other hand, if you expect to encounter several financial difficulties in the near future then your demand for products and services then you are likely to save your money right now.

Consumer expectation of future price:

If consumer expects future price of goods are going to increase then the demand of commodities will deceases now than later.

Additional factors related to market demand:

Population

Population is of course a key determinant of demand. Although all forest products do not necessarily enter final consumer markets, the actual markets are largely presumed to be functionally related to population. Growing populations are positively correlated to timber demands in the aggregate, as well as specifically to individual forest products. Frequently, population and income estimators are combined, as in the case of the use of Gross Domestic Product per capita.

End market indicators

The use of end market indicators as determinants of demand is frequently incorporated into demand analysis. For example, much of the final use of forest products is linked to construction (residential and total). Indicators and trends related to construction activities, or which are determinants of construction, provide indirect estimates of the influence of these activities as the source of derived demand for wood. Housing starts, public investments, interest rates, etc. can be highly correlated to timber demand.