Determinants of Demand
Determinants of demand are the factors that influence the quantity of a good or service that consumers are willing and able to purchase at various prices. These determinants include consumer preferences, income levels, prices of related goods, expectations about future prices, and the number of buyers in the market. Changes in these determinants can shift the entire demand curve.
8 Key excerpts on "Determinants of Demand"
eBook - ePub- Tom Craig, David Campbell(Authors)
- 2012(Publication Date)
- Routledge(Publisher)
...We may say, therefore, that the total demand for product A is 10,000 units a month if the price is 45 pennies per unit. Thus all three components must be in place before the demand can be said to be effective. The Determinants of Demand In seeking to answer the question why the demand for a product is as it is, we must explore the reasons behind consumer choices. We can intuitively appreciate that demand for goods and services varies, both according to the type of product and over time. There are five broad variables which determine the demand for any given product: the financial ability to pay; changing tastes and fashions (i.e. changing preferences); the prices of other, related products; the consumer’s perceptions of what will happen in the future; the type of product it is. We will examine each in turn. Ability To Pay The ability to pay for goods and services will obviously have a huge influence on demand. If consumers have a lot of spending power (or disposable income), demand for most products will rise. Conversely, if consumers are ‘hard up’, demand will tend to fall. The power of consumer spending will depend, among other things upon macroeconomic features such as: the level of wage or income increases, tax rates, interest rates, employment and unemployment levels in the country. Consumer Preferences The second determinant of demand is the changing face of consumer preferences. If financial issues determine the consumer’s ability to buy, preferences concern the consumer’s willingness to buy. It is obvious that people change over time in what they want to buy. It may be that one type of product is in demand 1 year, but not the next...
eBook - ePub- Andrew Barkley, Paul W. Barkley(Authors)
- 2016(Publication Date)
- Routledge(Publisher)
...This topic is further explored in Chapter 16. 9.4.5 Population Although the list could be expanded, population is the final determinant of demand mentioned here. Population growth has a direct and important impact on consumption. More people will buy more goods, particularly necessities such as food. The result is similar to an increase in income in low-income nations. If the population of Ethiopia increases, then Ethiopia’s demand for wheat will increase: if the population of Ethiopia increases, the country’s demand for food will rise. The last few pages have dealt with the Determinants of Demand. Chapter 10 uses much of this information to explain how markets operate. The supply and demand curves from Chapter 8 and this chapter merge into one graph, to aid the study of the interaction between producers and consumers. 9.5 Summary Demand is the consumer willingness and ability to pay for a good. The demand curve is a function connecting all combinations of prices and quantities consumed for a good, ceteris paribus. The demand schedule presents information on price and quantities purchased. The market demand curve is the horizontal summation of all individual demand curves. The law of demand states that the quantity of a good demanded varies inversely with the price of a good, ceteris paribus. The price elasticity of demand relates how responsive quantity demanded is to changes in price [E d = %ΔQ d /%ΔP]. An inelastic demand curve is one where a percentage change in price results in a relatively smaller percentage change in quantity demanded (|E d | < 1). An elastic demand is one where a percentage change in price results in a larger percentage change in quantity demanded (|E d | > 1)...
eBook - ePubMicroeconomics
A Global Text
- Judy Whitehead(Author)
- 2014(Publication Date)
- Routledge(Publisher)
...These other factors being held constant are referred to as shift factors. Changes in price are reflected in movements along the demand curve. Changes in the other factors which affect demand, such as income, taste or preferences and the price of other goods, are reflected in a shift in the demand curve. These shift factors affect the position of the demand curve. Demand is also affected inter alia by: The availability of credit The nature of the distribution of income Market size Accumulated wealth or affluence of the population Cultural habits and behaviour External influences from foreign media such as television and the internet (demonstration effect) The consumption behaviour of others in the market (see Bandwagon, Snob and Veblen effects in Chapter 4). 3.1.1 Derivation of market demand The market demand for a given commodity is simply the horizontal summation of the demands of the individual consumers. Consider a market with n consumers. The market demand is the horizontal summation of the demand curves of all n consumers. This is illustrated for two consumers (A and B) in Figure 3.1. It should be recognized that, although for one consumer a good may be a Giffen good (i.e. with a positively sloped demand curve), the market demand will still have the normal negative slope unless it is a Giffen good for a large enough number of consumers in that market. Figure 3.1 Horizontal summation of individual demands to give market demand 3.1.2 Shape of the demand curve The demand curve is usually drawn as a straight line (linear demand curve). However, it may also take the form of a curve, usually one that is convex to the origin. The linear demand curve The linear demand function, expressing the relationship between the quantity demanded (Q) and the price (P) of a commodity may be written as: where, It is important to understand that, while the demand function is written with quantity (Q) as a function of price (P), it is drawn with price (P) as a function of quantity (Q)...
eBook - ePubConceptualising Demand
A Distinctive Approach to Consumption and Practice
- Jenny Rinkinen, Elizabeth Shove, Greg Marsden(Authors)
- 2020(Publication Date)
- Routledge(Publisher)
...Instead, demand is thought to be tied to supply through a ‘self-regulatory’ mechanism linked to a ‘law’ of market equilibrium meaning that products demanded at a price are equalled by products supplied at that price (McConnell et al., 2009). This basic understanding leads commentators to identify what are described as the ‘drivers’ of demand, of which price is one. In essence, the assumption is that if prices rise, people will cut back on how much they consume (demand will reduce), or buy somewhat more if costs go down (demand increases). Other drivers can also come into play. These might be identified by, for example, measuring how patterns of ice cream consumption vary with outdoor temperature. The method of isolating and analysing the effects of individual factors, one by one, results in similarly ahistorical representations of demand and how it changes. To continue, understandings of weather as a driver of ice cream demand would be indifferent to the seasonal organisation of daily life, to the large number of day trips to the coast or to a park on hot days or to the also seasonal lives of ice cream sellers. Put simply, the wider social practices which change and on which changes in demand depend are absent from talk of preferences and drivers. Patterns of ice cream consumption are not the same as patterns of energy demand and as is obvious, not all goods and services are alike. In response, economists have introduced additional terms to explain what are seen as discrepancies and deviations between supply–demand relations. The notion of price elasticity is, for instance, used to account for the fact that when prices rise, consumers are more willing, or able, to forego some items and thus reduce some forms of demand than others...
eBook - ePub- Milton Friedman(Author)
- 2017(Publication Date)
- Routledge(Publisher)
...Consider the demand for oleo. The variables that are included in (1) are the prices of or quantities of closely related commodities, i.e., substitutes or complements. The variables that are placed in (2) include tastes and preferences, money income, the average price of all (or all other) commodities, wealth and distribution of income. Everything else in the world is included in (3). Of course, just where the line is drawn between these categories cannot be specified once and for all; it depends on what effects are regarded as “significant” for the purpose in hand and on empirical knowledge about the relevant factors and their effects. The demand function with the above classification in mind may be written in the following manner: where p y and p z are the prices of commodities closely related to x, P 0 is the average price of other commodities, I stands for income and its distribution, W for wealth and its distribution, and T for tastes and preferences. If one goes to the limit of regarding any conceivable effect as “significant” and is unwilling to put anything into category (3), then it would be necessary to include the price of “every” other commodity, the income and wealth of every individual, and the like. 2 Such a demand curve is used by mathematical economists and is frequently written as follows: The first set of prices are the prices of products; the second, of the services of factors of production. This “Walrasian” function does not indicate ex plicitly all of the variables held constant. It includes explicitly only prices. Implicitly, however, the quantity of resources of various kinds owned by different individuals is supposed fixed, and so a particular set of factor prices is taken as determining the income and wealth of every individual. Similarly, tastes and preferences are also regarded as fixed. This Walrasian demand function may, as already suggested, be regarded as a limiting form of a function like that of equation 1...
eBook - ePubEconomics for Investment Decision Makers
Micro, Macro, and International Economics
- Christopher D. Piros, Jerald E. Pinto(Authors)
- 2013(Publication Date)
- Wiley(Publisher)
...However, if table salt increased in price to hundreds of dollars per ounce, consumers would become more responsive to its price changes. Exhibit 4-3 reports several empirical estimates of price elasticity of demand. EXHIBIT 4.3 Empirical Price Elasticities Various sources, as noted in McGuigan, Moyer, and Harris (2008, 95). These are the elasticities with respect to the product’s own price; by convention, they are shown here as positive numbers. Commodity (Good/Service) Price Elasticity of Market Demand Alcoholic beverages consumed at home Beer 0.84 Wine 0.55 Liquor 0.50 Coffee Regular 0.16 Instant 0.36 Credit charges on bank cards 2.44 Furniture 3.04 Glassware/china 1.20 International air transportation, United States/Europe 1.20 Shoes 0.73 Soybean meal 1.65 Tomatoes 2.22 3.1.2. Other Factors Affecting Demand There are two other important forces that influence shifts in consumer demand. One influential factor is consumer income and the other is the price of a related product. For normal goods, as consumer income increases, the demand increases. The degree to which consumers respond to higher incomes by increasing their demand for goods and services is referred to as income elasticity of demand. Income elasticity of demand measures the responsiveness of demand to changes in income. The calculation is similar to that of price elasticity, with the percentage change in income replacing the percentage change in price. Note the new calculation: ε Y = (% change in Q D) ÷ (% change in Y) where ε Y is income elasticity of demand, Q D is the quantity demanded, and Y is consumer income. For normal goods, the measure ε Y will be a positive value. That is, as consumers’ income rises, more of the product is demanded. For products that are considered luxury items, the measure of income elasticity will be greater than 1. There are other goods and services that are considered inferior products. For inferior products, as consumer income rises, less of the product is demanded...
eBook - ePub- Enrico Colombatto(Author)
- 2016(Publication Date)
- Routledge(Publisher)
...For example, one must have some information about the shape of the demand curve/region in order to assess the effects of a tax (see Chapter 6). Demand analysis explains why governments are inclined to tax goods with steep demand curves, so that consumers will keep buying the taxed commodity (and pay the tax) – as happens in the case of petrol/gasoline. Similarly, innovative producers strive to guess the shape and the position of the latent demand for new products, which might be steep (‘price inelastic’, according to the economic jargon) when a successful product is introduced, but might well rotate and become flat (‘price elastic’) as soon as imitations and substitutes follow. The thinking tools typical of traditional demand analysis can also be applied to related domains and contribute powerfully to a better understanding of areas in which common sense and intuition might not suffice. To illustrate this point, the next sections will examine three new issues: intertemporal choices, interest rates and happiness. 2.6 Intertemporal consumption and the rate of interest Demand curves are traditionally conceived in terms of goods and services. This is sensible, since these are the kinds of choices individuals face every day. When individuals engage in consumption, they are fairly aware of what they can afford to spend over a given period (a month, a year), and their task consists in distributing the budget at their disposal across a set of desirable items. Yet, the individual's expenditure budget over a given period is itself the result of a choice. For example, one could decide to spend all the money one earns immediately, day after day, month after month. Most frequently, however, current expenditure differs from current income. In particular, it might happen that one wants to consume in excess of his current income and thus plans to cover the difference by borrowing or by drawing on past savings...
eBook - ePub- Stanley Bober(Author)
- 2016(Publication Date)
- Routledge(Publisher)
...We know from Figure 4.2 our discussion on pricing that consumer behavior, in practically all instances, is simply not the driving force behind price changes. We need to understand consumer expenditures as the means to constantly alter patterns of demand with the accompanying changes in capacity utilization that may or may not alter the markup price. The increase in demand that is normally reckoned in terms of an increase in money income and/or a change in tastes, opens to the consumer a whole array of new goods as one acquires different preferences in line with higher income levels. The orthodox emphasis on price-driven substitutability between familiar goods or even being able to increase one’s purchases of such “baskets” misses much of what is involved in consumer behavior, especially when seen within a context of the secular growth of real income. This context will have our consumer acquire new needs and rearrange priorities (or desirability) among goods that one has been purchasing. The entire psychological (utility) relationship to a combination of familiar goods becomes unhinged (if indeed it was ever established) with factors such as social pressure and “what is new” being dominant in determining the pattern of demand. We return to these points when we begin to consider the heterodox approach to household demand; but now we want to set out the alternative (“modem”) indifference-curve view of a utility-based understanding of consumer demand...
