Module 25: Determinants of Demand

Determinants of demand

Income: Usually, when incomes increase, consumers will have more money to spend. For most goods, an increase in income leads to an increase in demand. These goods, such as televisions and cars, are called normal goods. However, not all goods are normal. For example, when people's incomes increase, demand for bus travel decreases, because more people can afford to take taxis or even lease or buy their own cars. Bus transportation is an example of what economists call an inferior good. Tastes and Preferences: Basically, the more that people prefer a good or service, the more they demand it. For example, suppose that fish was reported to lower cholesterol levels. This could increase the demand for fish because many people prefer to eat healthy. The reverse is also true. The more that people dislike a good or service, the less they will demand it. When mad cow disease broke out in the United Kingdom, people ate less beef and demanded less of it. When people's tastes and preferences change and they want more of a product, demand for that product will increase.

Determinants of Demand—2

Prices of Related Goods and Services: The goods referenced in this category can be broken down into two types—goods that are substitutes and goods that are complements. Suppose you walk into your favorite video game store and you notice the price of gaming system A has gone down and the price of gaming system B has stayed the same. The law of demand states that people will have more incentive to buy system A. They are less likely to buy system B because the two systems are good substitutes for each other—meaning that they can easily be replaced by the other. Suppose instead that you walk into that same store and find that even though gaming systems A and B are the same price, the price of games for system A has gone down. The law of demand states that people will buy more games for system A, and there is also more incentive to buy gaming system A, even though its price has not changed. This is because the goods (the games and the gaming system) are used together, so they are complements. If the price of a good or service decreases, the demand for a substitute good decreases and the demand for a complementary good increases. Consumer Expectations: These expectations can be based on price, income, or product availability. If the price of a good or service will decrease in the near future, demand for the good or service will decrease now, before the price changes. Likewise, if the price of a good or service is expected to increase in the near future, the demand for the good or service will increase now. For example, people will demand more of an investment (like stocks or real estate) today if they expect the investment's value to increase in the near future. Also, if future income is expected to increase, demand for goods and services will also increase now, before the income changes. If future income is expected to decrease (like people losing their jobs), demand for goods and services will also decrease now, before income changes. Finally, what consumers expect about the availability of a good or service also affects demand. If consumers expect a good not to be available in the near future, demand for that good will increase now. For example, people worried about the availability of gas in the 1970s and again in 2001. As a result, the demand for gas rose as the fear of future unavailability increased. Number of Buyers: When there are more buyers in the market, demand increases, which means there will be more quantity demanded at every price. As the number of buyers in a market increases, the overall market demand will increase. Likewise, if there are fewer buyers in the market, there will be less market demand.