explain briefly the three determinants of demand
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Determinants of Demand
When price changes, quantity demanded will change. That is a movement along the same demand curve. When factors other than price changes, demand curve will shift. These are the determinants of the demand curve.
1. Income: A rise in a person’s income will lead to an increase in demand (shift demand curve to the right), a fall will lead to a decrease in demand for normal goods. Goods whose demand varies inversely with income are called inferior goods (e.g. Hamburger Helper).
2. Consumer Preferences: Favorable change leads to an increase in demand, unfavorable change lead to a decrease.
3. Number of Buyers: the more buyers lead to an increase in demand; fewer buyers lead to decrease.
4. Price of related goods:
a. Substitute goods (those that can be used to replace each other): price of substitute and demand for the other good are directly related.
Example: If the price of coffee rises, the demand for tea should increase.
b. Complement goods (those that can be used together): price of complement and demand for the other good are inversely related.
Example: if the price of ice cream rises, the demand for ice-cream toppings will decrease.
5. Expectation of future:
a. Future price: consumers’ current demand will increase if they expect higher future prices; their demand will decrease if they expect lower future prices.
b. Future income: consumers’ current demand will increase if they expect higher future income; their demand will decrease if they expect lower future income
When price changes, quantity demanded will change. That is a movement along the same demand curve. When factors other than price changes, demand curve will shift. These are the determinants of the demand curve.
1. Income: A rise in a person’s income will lead to an increase in demand (shift demand curve to the right), a fall will lead to a decrease in demand for normal goods. Goods whose demand varies inversely with income are called inferior goods (e.g. Hamburger Helper).
2. Consumer Preferences: Favorable change leads to an increase in demand, unfavorable change lead to a decrease.
3. Number of Buyers: the more buyers lead to an increase in demand; fewer buyers lead to decrease.
4. Price of related goods:
a. Substitute goods (those that can be used to replace each other): price of substitute and demand for the other good are directly related.
Example: If the price of coffee rises, the demand for tea should increase.
b. Complement goods (those that can be used together): price of complement and demand for the other good are inversely related.
Example: if the price of ice cream rises, the demand for ice-cream toppings will decrease.
5. Expectation of future:
a. Future price: consumers’ current demand will increase if they expect higher future prices; their demand will decrease if they expect lower future prices.
b. Future income: consumers’ current demand will increase if they expect higher future income; their demand will decrease if they expect lower future income
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