Determinants of Demand

Demand, or a population's need or desire to purchase a good, changes depending upon several factors. These factors are called the "determinants of demand" and a change in a demand, as caused by the determinants, will lead to a shift in the demand curve.

  • Income of buyers
  • Taste and Preference of buyers
  • Price of Complementary Goods
  • Price of Substitutes
  • Number of buyers
  • Price Expectations of Buyers

make up the Determinants of Demand, and thus have the ability to shift the Demand curve



Change in Income

Demand is also dependent upon this variable. Consumer's income rises and falls, and that leads to changes in demand. If a consumer treats bologna as an inferior good and that consumer's income increases, the demand for bologna will decrease. This is because consumers would demand higher-quality goods, since they now have money to spend on more expensive items.

Change in Taste and Preference

This determinant shows how consumer's "taste" in a product rises and falls for various reasons. For example, if today were Feb. 14, consumer's "taste" in roses and chocolates would rise because roses and chocolates are seen as necessary gifts for loved ones on Valentine's Day. This increase in taste would lead to a rightward shift of the demand curve, as signalling the change in demand.

Change in Price of Complementary Goods

This determinant shows how goods related to a product can, for various reasons, change the demand for a product. For example, peanut butter and jelly are related goods because they are used to make a popular sandwich. If the price of peanut butter falls, consumers will demand less peanut butter, which will lead to an increase in jelly, since people haven't bought peanut butter and therefore won't buy jelly to make a sandwich.

Change in Price of Substitutes

This determinant shows how goods that can work as substitutes of each other can change the demand of a product. For example, brown sugar and white sugar can be considered substitues. If the price of brown sugar goes up, the demand for white sugar will go up because of the substitution effect, where consumers want to buy the cheaper substitute.

Change in Number of buyers

Since demand is dependent upon consumers demanding a product, the number of consumers is also a determinant of demand. For example, if the population of a rural farming county is relatively small, but then the population explodes, there will be a demand increase in that county for food since there are more people to feed.

Change in Price Expectations of Buyers

The demand curve shifts depending on what the buyers are expecting. For example, if Americans expect that the price of televisions will increase in the future, they will buy more televisions right now when the price is low. This will cause the demand for televisions to increase.


Mnemonics to Memorize- PRICES

  • P-preference of tastes
  • R-related goods
  • I-income of buyers
  • C-consumers (number of buyers)
  • E-expectations of buyers
  • S-substitutes

DIAGRAM of Demand Curve Shifting

ChangesInDemand.jpg
Demand curve moves right= Increase in Demand Demand Curve moves Left= Decrease in Demand

Determinants of demand shift the demand curve.

For example, if consumer's taste in a product rose, the demand curve for that product would move to the right to signal that increase.
If consumer's taste in a product fell, the demand curve for that product would move leftwards to signal that decrease.
















Helpful LINKS


Short Powerpoint about Demand: great powerpoint reviewing all of unit 2, not just the determinants

CH.5 Determinants of Demand : a very thorough review of the determinants PLUS a quiz with answers

What do changes in determinants of demand do to the demand curve?: although it's from the infamous wikipedia, gives helpful examples of determinants of demand

Youtube VIDEO




The most watched video about Determinants of Demand!



Economics in the News

Pretty Pricey Polymer

This article relates to Determinants of Demand, specifically Price Expectations of Buyers and Price of Substitutes. Price of polymers have"... increased by 22% in January alone—and has risen by 133% over the past two years," and Americans are reacting to the price change.

As Americans realize that the price of Polymers will increase in the near future, they will buy more polymers now while the price is relatively low. This relates to Price Expectations of Buyers because Americans are buying more polymers because they expect the price to increase. This increase in demand will shift the demand curve to the right. The article immediately suggest this idea by saying, "Buy that model aeroplane you always promised yourself today, not tomorrow," meaning that it is better to buy it now when the price of polymers is low.

Secondly, as the price of polymers increase and the price of substitutes stay the same, consumers will buy more of the substitutes, causing the demand curve of the substitutes to shift to the right. The article clearly illustrates this idea by saying, "according to Plastics News some American fast-food chains are switching back to paper cups for fizzy drinks," showing that the demand for paper cups will increase.This shows the determinant Price of Substitues, because as price of polymers increase, the demand for paper cups increase. This also relates to the substitution effect, where at a lower price, consumers will tend to substitute the cheaper good for the more expensive. In this example, Americans have substituted polymers for the more cheaper paper cups.