Determinants of Demand

Unit 2 - Lesson 2
Learning Outcomes
1. Explain how demand may be affected by factors such as:
Changes in Income (Normal/Inferior Goods)
Preferences
Substitute Goods
Complements
Demographic changes
2. Distinguish between a movement along the Demand curve and a shifts of
the Demand curve.
3. Draw diagrams to show the difference between a movement along the
Demand curve and shifts of the Demand curve.
Movement along the curve...
Movement along the demand
curve happen when there is a
change in price.
An increase in price from P1
to P2 leads to a decrease in
Quantity Demanded from Q1
to Q2.
Changes in Price lead to a
change in Quantity Demanded
Shifts in Demand Curve
Shifts in the demand curve
occur when there are changes
in the non-price determinants:
1. Income
2. Price of related goods
3. Tastes & preferences
4. Number of buyers
5. Expectation of future price
& income
Increase in Demand - Right shift
Decrease in Demand - Left shift
https://courses.byui.edu/econ_151/presentations/images/Lesson_06/6.08.png
Price remains constant
Non-price Determinants
Income: Individuals tend to spend more money as their income increases
and less when their income decreases, but how this affects Demand depends on
the type of good it is.
Normal Good: as Income increases the demand
for these goods increases (shift right). There is a
direct relationship between Income and Demand.
Inferior Goods: as Income increases the demand
for these goods decreases (shift left). There is an
indirect relationship between Income and Demand.
Generally they are cheaper alternatives to higher
quality goods.
http://education-portal.
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/16/public_transportation.
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http://www.bized.co.
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Substitute Goods
Substitute Good: Goods that an individual might easily use in place of
another.
There is an indirect relationship between Price and Demand for substitute
goods.
http://faculty.sacredheart.edu/mamunk/ec203/ch4_files/image007.gif
Coke & Pepsi are considered substitutes.
An increase in the price of Coke from
P1 to P2 will cause a decrease in the
Quantity Demanded of Coke from Q1
to Q2.
This will lead to an increase in
Demand (right shift) for Pepsi from D1
to D2.
The increase in Demand is caused by
the non-price determinant of Substitute
goods.
Complementary Goods
Complementary Goods: Goods that are normally consumed together.
Examples: DVD players and DVDs; Cameras and Memory Cards.
There is an indirect relationship between Price of Good A and the Demand
for Good B.
A decrease in the price leads to an increase
in the Quantity Demanded for cars.
The result of this price decrease is an
increase in the Demand (right shift) for
Complementary goods such as driving
lessons.
The increase in demand for driving lessons is
caused by the non-price determinant
Complementary goods.
Summary...
Indirect
Relationship
Direct
Relationship
More determinants.
Taste & Preferences: Goods become more or less popular and this will cause
shifts in the Demand curve.
A good becomes more fashionable, the demand will increase (right shift).
Expectation of Future Prices: If individuals expected the price of a good to
increase over the next year, there will be an increase (right shift) in demand
now.
Expectation of Future Income: If individuals expect their incomes to rise in
the foreseeable future, there will be an increase (right shift) in demand now.
And more.
Number of Potential Buyers: An increase in the number of potential buyers
will lead to an increase in Demand for the good.
Demographic Changes: Demand can change when there is a major shift in
population structure or income structures.
Government Policy: Say a government increases taxes this may lead to a
decrease in Demand because of less income available to spend.
Seasonal Change: change in season can lead to increase/decrease in
demand.
As rainy season comes in Dar, what do you think will happen to the demand of
rain boots?