Determinants of demand

Demand is how much someone is willing and able to buy and hinges upon number of different factors. People will consider the price of an item and their income when deciding how much to buy. Real world situations are not as simple. There are other determinants which effect demand.

In many situations, price is the most fundamental determinant of demand. If all other things are equal then the law of demand prevails for most of goods and services. When people decide to buy goods or services, two questions come to their mind: What is the price? How much should they buy?

People also look at their income when deciding on purchases and ask themselves two important questions: What do we need? How much we can afford? Then the choice is made between normal goods and inferior goods. When income goes up the demand for normal goods goes up. When the income decreases, the demand for inferior goods goes up. For example, choosing between a taxi ride (superior product) and a transit ride (inferior product).

The change in a taste and preference of a product changes the demand for it. For example, if a celebrity recommends a product (e.g. The Oprah show) then the demand for recommended products goes up. On the other hand, public scares decrease demand, such as the decline in demand for beef products during the Mad Cow Disease crisis in 1996.

When people decide to buy, they tend to take into consideration the prices of substitute goods. For example if the price of butter goes up then people tend to buy margarine. For complimentary goods, the change in price of one good will cause the change in the complimentary good or vice versa. For example, the decrease in the price of video games will increase the demand for video consoles.

The number of buyers may not be a determinant for individual demand, but it is an important determinant for the whole market. An increase in the number of buyers leads to an increase in demand, whereas a decrease in the number of buyers leads to a decrease in the demand.

Today’s demand is also based on the future expectations of price, income, and prices of related goods. Consumers will demand more of a product today if they expect the price to go up in the near future. People will also consume more if their income is going to go up in the future and their jobs are secure.