Determinants of Demand
What is Determinants of Demand?
Determinants of demand are factors that shift the demand curve, changing the quantity demanded at each price.
The main determinants of demand are consumer income, preferences, the prices of related goods, and expectations. When these factors change, the demand curve shifts to the right or left. For example, if consumer income rises, demand will shift to the right, indicating an increase in demand at each price level.
Determinants of Demand: a worked example
Start a trail-shoe market at Qd = 480 minus 4P and Qs = 80 plus 4P. Setting them equal gives 480 minus 4P = 80 plus 4P, so 400 = 8P, P = $50 and Q = 280 pairs. Now move one determinant: average buyer income rises, and since trail shoes are normal for these buyers, they want 80 more pairs at every price. Demand becomes Qd = 560 minus 4P. Solving again, 560 minus 4P = 80 plus 4P gives 480 = 8P, so P = $60 and Q = 320. Price and quantity both rose, the fingerprint of a demand shift with supply untouched. Reverse the determinant instead: if buyers expect a cheaper model next month and demand falls by 80 pairs from the original curve, Qd = 400 minus 4P gives 320 = 8P, so P = $40 and Q = 240.
The mistake students make with determinants of demand
The most costly mistake is smuggling supply shifters into the demand list. Production costs, input prices, technology and taxes on producers change what sellers offer, not what buyers want, yet they turn up constantly in student answers about demand. Ask who the factor acts on: if it changes a buyer's willingness or ability to purchase, it belongs to demand. A second trap is the expectations shifter, which runs against intuition. Expecting a higher price next month raises demand today, because buyers pull purchases forward rather than waiting.
Determinants of Demand questions
What are the determinants of demand?
Five shifters move a demand curve: buyer income, tastes and preferences, prices of related goods such as substitutes and complements, expectations about future prices or income, and the number of buyers in the market. Each one changes quantity demanded at every price at the same time, which is what makes the whole curve move. The good's own price is deliberately absent from the list, because a price change moves the market along the existing curve instead.
Which way does the demand curve shift when income rises?
Rising income shifts demand right for a normal good and left for an inferior good. Buyers with more money purchase more restaurant meals at every price, so that curve moves right and equilibrium price and quantity both climb. The same buyers purchase fewer packets of instant noodles, so that curve moves left and equilibrium price and quantity both fall. Naming which category the good belongs to has to come before stating any direction.
How do expectations shift demand?
Expected future prices shift current demand in the same direction as the expectation. Buyers who believe concert tickets will cost more next week buy now, pushing today's demand curve right and raising today's price. Buyers expecting a price cut delay, shifting today's demand curve left. Expected income works the same way, since a student who has just accepted a summer job often increases spending well before the first paycheck actually arrives.
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Related terms
Common comparisons
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