Determinants of Demand
Demand is a crucial aspect of economics, and therefore economists must recognize real-world situations that impact the demand curve.
Before discussing the determinants, it is imperative to understand that price is NOT a determinant of demand. Determinants include all factors besides price that affect the demand curve.
Price is not a determinant because a determinant shifts the entire curve left or right; however, when price changes, demand merely moves along the same curve. In other words, price is the points of a curve, whereas determinants are the reason why those points are what they are. By the end of this article, this will all make sense.
In demand, the determinant can either cause consumers to buy more of a product at the same price or buy less of a product at the same price.
Notice how the determinants are changing the demand without changing the price? This explains why price is not a determinant.
Before discussing the determinants, it is imperative to understand that price is NOT a determinant of demand. Determinants include all factors besides price that affect the demand curve.
Price is not a determinant because a determinant shifts the entire curve left or right; however, when price changes, demand merely moves along the same curve. In other words, price is the points of a curve, whereas determinants are the reason why those points are what they are. By the end of this article, this will all make sense.
In demand, the determinant can either cause consumers to buy more of a product at the same price or buy less of a product at the same price.
Notice how the determinants are changing the demand without changing the price? This explains why price is not a determinant.
The Demand Curve
When the determinant causes the demand curve to shift up to the right (demand increases), consumers will purchase more of the product at any given price. On the contrary, when the determinant causes the demand curve to shift down to the left (demand decreases), consumers will purchase less of the product at any given price.
The demand curve always appears to be negative on a graph.
The demand curve always appears to be negative on a graph.
The 6 Determinants of Supply
1. Consumer Incomes
Consumer incomes play a fundamental role in determining demand because people’s expenditures are based on their earnings.
If people’s wages increase, they will be willing to spend more, causing demand to increase. Similarly, if people’s wages decrease, they will want to save more and spend less, causing demand to decrease.
If people’s wages increase, they will be willing to spend more, causing demand to increase. Similarly, if people’s wages decrease, they will want to save more and spend less, causing demand to decrease.
2. Consumer Attitudes/Trends
Consumer attitudes and trends considerably influence the demand for particular products. While reading this section, think about whether these scenarios apply to you are not.
Here are the major consumer trends/attitudes that impact demand:
Celebrities possessing and/or advertising a product or brand.
Celebrities, such as social media influencers, introduce new trends and new styles, causing people to want to buy that product even if it’s at a higher price. For instance, social media influencers on TikTok constantly create content wearing different styles of clothing. Other TikTokers copy their dressing style, and eventually, it becomes the new fashion. Since most people don’t want to be an outcast, they will purchase clothing that resembles the new trend regardless of a higher price.
Many people misconceive that celebrities solely play a role in increasing demand. Celebrities can also be the reason behind a decrease in demand if they suddenly stop advertising or publicly degrade the product. This was proven recently (June 16, 2021) when Christiano Ronaldo, one of the most famous soccer players in the world, pushed aside 2 Coca-Cola bottles and held up water at a press conference. Coca-Cola was drastically impacted as its shares plummeted by more than 5 billion dollars. The drop implies that the demand for Coca-Cola declined due to a celebrity’s actions.
Family
Family is another major factor in consumer attitudes because most people will make buying decisions based on their families’ preferences and opinions.
Religion
Religion contributes to consumer attitudes because many people make decisions regarding their purchases of specific products based on their religion. For instance, if a religion disallows the consumption of meat, the demand for meat will decline. On the other hand, if a religion promotes offering milk to God, then demand for milk will elevate.
Seasons
When people consider buying a product, they often examine whether it will be beneficial for them in the short term. For this reason, many people may only purchase products that will be useful for them in the current season.
Along with spring, summer, fall, and winter, other seasons, such as holiday seasons, also influence demand. For example, during Christmas time, people want to decorate their houses; therefore, the demand for lights, Christmas trees, inflatable yard decorations, and ornaments increases. Similarly, the demand for bathing suits increases in the summer, when people go to the beach/pool.
Research
If a study or research reveals information about something that changes people’s mindset about it, the demand for it will adjust. A study/research will be exceptionally impactful if an influential source, such as the government, reveals the information.
To make this more concrete, imagine CDC announces a discovery that strawberries cause cancer. When people hear this, the majority will become apprehensive about eating strawberries as it might give them cancer. As a result, the demand for strawberries will plummet.
Here are the major consumer trends/attitudes that impact demand:
Celebrities possessing and/or advertising a product or brand.
Celebrities, such as social media influencers, introduce new trends and new styles, causing people to want to buy that product even if it’s at a higher price. For instance, social media influencers on TikTok constantly create content wearing different styles of clothing. Other TikTokers copy their dressing style, and eventually, it becomes the new fashion. Since most people don’t want to be an outcast, they will purchase clothing that resembles the new trend regardless of a higher price.
Many people misconceive that celebrities solely play a role in increasing demand. Celebrities can also be the reason behind a decrease in demand if they suddenly stop advertising or publicly degrade the product. This was proven recently (June 16, 2021) when Christiano Ronaldo, one of the most famous soccer players in the world, pushed aside 2 Coca-Cola bottles and held up water at a press conference. Coca-Cola was drastically impacted as its shares plummeted by more than 5 billion dollars. The drop implies that the demand for Coca-Cola declined due to a celebrity’s actions.
Family
Family is another major factor in consumer attitudes because most people will make buying decisions based on their families’ preferences and opinions.
Religion
Religion contributes to consumer attitudes because many people make decisions regarding their purchases of specific products based on their religion. For instance, if a religion disallows the consumption of meat, the demand for meat will decline. On the other hand, if a religion promotes offering milk to God, then demand for milk will elevate.
Seasons
When people consider buying a product, they often examine whether it will be beneficial for them in the short term. For this reason, many people may only purchase products that will be useful for them in the current season.
Along with spring, summer, fall, and winter, other seasons, such as holiday seasons, also influence demand. For example, during Christmas time, people want to decorate their houses; therefore, the demand for lights, Christmas trees, inflatable yard decorations, and ornaments increases. Similarly, the demand for bathing suits increases in the summer, when people go to the beach/pool.
Research
If a study or research reveals information about something that changes people’s mindset about it, the demand for it will adjust. A study/research will be exceptionally impactful if an influential source, such as the government, reveals the information.
To make this more concrete, imagine CDC announces a discovery that strawberries cause cancer. When people hear this, the majority will become apprehensive about eating strawberries as it might give them cancer. As a result, the demand for strawberries will plummet.
3. Complementary Goods
Complementary goods are products that associate with each other. For example, gas and cars are complementary goods because you need gas to power cars.
Since complementary goods are related to each other, the relationship between their demands is direct. Thus meaning that if the demand for one good is rising, the demand for the complementary good is also rising, and vice versa.
Furthermore, if the price of a product goes down, its complementary good’s demand will go up (the demand for the product itself will not go down). This happens because people have more money to spend, which they tend to spend on complementary goods. For instance, if the price of tennis rackets decreases, the demand for tennis balls (not tennis rackets) increases because people have more money to spend on tennis.
Since complementary goods are related to each other, the relationship between their demands is direct. Thus meaning that if the demand for one good is rising, the demand for the complementary good is also rising, and vice versa.
Furthermore, if the price of a product goes down, its complementary good’s demand will go up (the demand for the product itself will not go down). This happens because people have more money to spend, which they tend to spend on complementary goods. For instance, if the price of tennis rackets decreases, the demand for tennis balls (not tennis rackets) increases because people have more money to spend on tennis.
4. Substitute Goods
Although quite obvious, substitute goods are goods that can take the place of other goods. Unlike complementary goods, the relationship between substitute goods’ demands is inverse. An inverse relationship signifies that if the demand for one good goes up, the demand for the substitute good goes down, and vice versa.
An example of substitute goods is branded clothes and unbranded clothes. If the demand for branded clothes decreases due to lower consumer incomes, the demand for unbranded clothes will automatically increase.
An example of substitute goods is branded clothes and unbranded clothes. If the demand for branded clothes decreases due to lower consumer incomes, the demand for unbranded clothes will automatically increase.
5. Population Changes
If the size of the population alters, the demand curve will change in the same way. If the size of the population increases, demand will increase, but if the population decreases, demand will also decrease.
Besides the size, the composition of the population also significantly impacts demand. For instance, if a population mainly consists of senior citizens, there will be greater demand for goods and services like walking sticks and personal care.
Besides the size, the composition of the population also significantly impacts demand. For instance, if a population mainly consists of senior citizens, there will be greater demand for goods and services like walking sticks and personal care.
6. Consumer Expectations
Consumer expectations are market-impacting events that people think might occur in the future. Since people tend to act impulsively, they will take action about something almost immediately.
For example, if people believe that the price of a certain product will increase soon, then its demand will increase. The demand increases instead of decreasing because people want to purchase as much of the product as possible before the price rises. The duration of the new demand curve varies depending on the situation.
In the United States, people have recently witnessed this during the Covid-19 pandemic. When consumers saw that the Covid-19 situation was worsening in March 2020, they expected supplies to run out soon. In an attempt to possess sufficient supplies, people rushed to the market and purchased abundant supplies. In this scenario, the demand for supplies immediately spiked, but eventually returned to normal.
For example, if people believe that the price of a certain product will increase soon, then its demand will increase. The demand increases instead of decreasing because people want to purchase as much of the product as possible before the price rises. The duration of the new demand curve varies depending on the situation.
In the United States, people have recently witnessed this during the Covid-19 pandemic. When consumers saw that the Covid-19 situation was worsening in March 2020, they expected supplies to run out soon. In an attempt to possess sufficient supplies, people rushed to the market and purchased abundant supplies. In this scenario, the demand for supplies immediately spiked, but eventually returned to normal.
2 Crucial Things to Remember
- The demand curve does not shift due to price changes. The only way the curve can shift is if at least one of the determinants discussed above occurs. Price only resembles the points on the curve. Meanwhile, the determinants change the demand for every given price. In other words, for every given price, the quantity demanded will be different.
- In every scenario, only one curve can change. Both the supply and demand curves can never change at the same time. Hence, the determinants for supply and demand vary. Click here to learn about the determinants of supply.
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