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 personís 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: consumersí current demand will increase if they expect higher future prices; their demand will decrease if they expect lower future prices.

b. Future income: consumersí current demand will increase if they expect higher future income; their demand will decrease if they expect lower future income.

 

Review:

A change in quantity demanded is caused by a change in its own price of the good.

A change in demand is caused by a change in determinants.

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