Determinants of Demand
Determinants of demand (also called factors affecting demand) are the factors which cause the demand curve to shift. A change in any of the determinants of demand will cause the demand to change even if the price remains fixed. Major determinants of demand are:
Number of Buyers
Mostly, change in number of buyers directly affects the quantity of a product demanded at each price. When buyers increase, demand is likely to increase and if buyers decrease, it will probably decrease. For example, increase in number of students will increase demand for books.
Change in income affects demand directly in most cases. Increase in income of buyers will allow them to purchase more thus demand will be increased and decrease in income will restrict their purchases thus demand will be decreased. However for some goods demand usually varies inversely with change in income. For example, if the income of consumers who could only buy used cars increases such that they are now able to buy new ones, they will buy new cars instead of old. Thus demand for old cars will drop with increase in income.
Consumer tastes is another important determinant of demand. If consumer tastes change such that they now favor a product more, the will demand that product more and if their taste changes unfavorably they will demand lower quantity of that product. Businesses advertise their products to change consumer tastes in favor of their products.
Price of Related Goods
There are two types of related goods, substitute goods and complementary goods.
The price change of a substitute of a product usually affects the demand of the product directly. For example, price drop of solar power technology will decrease the demand for traditional electric power.
The demand for a product changes inversely with a price change of a complementary good. For example decrease in price of cars will increase the demand for cars. More cars will need more fuel and demand for fuel will be increased.
Change in consumer expectations about a product may affect the quantity they demand. For example if consumers expect that future price of a product A will increase, they will demand more to save money. Conversely, if they expect that future price will decrease, they will decrease demand and wait to benefit from lower future price.
Written by Irfanullah Jan