Do you ever have the desire to purchase a certain product? Maybe it's a new pair of shoes or a new video game. If so, have you considered what makes you want to buy that product? It's easy to say that every good you buy is just "because you want it." However, it is much more complicated than this! What goes on behind the demand of consumers? Read on to learn about the determinants of demand!
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Jetzt kostenlos anmeldenDo you ever have the desire to purchase a certain product? Maybe it's a new pair of shoes or a new video game. If so, have you considered what makes you want to buy that product? It's easy to say that every good you buy is just "because you want it." However, it is much more complicated than this! What goes on behind the demand of consumers? Read on to learn about the determinants of demand!
What is the definition of the determinants of demand? Let's begin by defining demand and its determinants, respectively.
Demand is the quantity of a good or service that consumers are willing to purchase at a certain price point.
Determinants are factors that affect the outcome of something.
Determinants of demand are factors that either positively or negatively affect the demand for a good or service in the market.
It's important to note the difference between aggregate demand and demand. Aggregate demand looks at the demand for all goods and services in the economy. Demand looks at the market demand for a particular good or service. In this explanation, we will be referring to "demand" unless explicitly stated otherwise.
Want to learn more about market equilibrium? Check out our explanation: Market Equilibrium.
What are the non-price determinants of demand? First, it's important to distinguish the difference between a change in demand and a change in quantity demanded.
A change in demand occurs when the demand curve shifts left or right due to a determinant of demand.
A change in quantity demanded occurs when there is a movement along the demand curve itself due to a price change.
So, what are the non-price determinants of demand? Another way to think of this is the following: what would make us buy more or less of a good when the price of a good stays the same?
Let's review the five determinants of demand once more:
Actually, the determinants of demand that we are talking about in this explanation are the non-price determinants of demand. This is because they can affect the demand for a good or service when the price of that good or service remains the same.
Now that we have broken down the definition of determinants of demand, we can take a look at the determinants of demand and supply.
Let's go over the basic idea of each determinant of demand to further our understanding. First, we will look at how each determinant can increase the demand for a good or service.
Let's go over the basic idea of each determinant of supply to further our understanding. First, we will look at how each determinant can affect the aggregate supply of a good or service.
What are the determinants of aggregate demand?
Aggregate demand has four components:
1. Consumer spending (C)
2. Firm investment (I)
3. Government purchases (G)
4. Net exports (X-M)
An increase in one or more of these components will lead to an increase in aggregate demand. There will be an initial increase followed by a further increase through the multiplier effect.
Figure 1 below shows the aggregate demand-aggregate supply model in the short run. An exogenous increase in one or more of the components of aggregate demand will shift the AD curve outward and will lead to higher real output and a higher price level in the short run.
Learn more about aggregate demand in these explanations:
- AD-AS Model
- Aggregate Demand
Let's take a look at examples of how determinants of demand can impact demand.
Let's say we are viewing the market for computers. Recently, consumers' preferences have shifted to Windows computers over Apple computers. In this instance, demand would increase for Windows computers and decrease for Apple computers. But if consumers' preferences shifted to Apple computers, then demand would increase for Apple computers and decrease for Windows computers.
Let's say that the number of car buyers increases in the United States due to immigration. Specifically, used cars seem to be affected the most by the increased number of buyers. Given that there are more buyers in the market, this will increase the overall demand for used cars. If the number of car buyers decreases in the United States, the demand for used cars would decrease since there are fewer buyers in the market.
Let's imagine that consumer income in the United States increases ubiquitously. Every individual in the country suddenly makes $1000 more than they did before — incredible! Let's say that since people have a higher income than before, they can afford to purchase healthier food options that cost more than unhealthier food options. This increase in consumer income will result in an increase in demand for healthier food options (fruits and vegetables). On the other hand, if consumer income decreases in the United States, this will result in a decrease in demand for healthier food.
Whether a good is a substitute good or complementary good for the related good determines whether the demand increases or decreases for the related good. If good A and good B are substitute goods, an increase in the price for good A will result in an increase in demand for good B. Conversely, a decrease in the price for good A will result in a decrease in demand for good B.
If good A and good B are complementary goods, an increase in the price for good A will result in a decrease in demand for good B. Conversely, a decrease in the price for good A will result in an increase in aggregate demand for good B. What is the intuition here? If both goods are complementary, a price increase in one good will make the bundle more expensive and less attractive to consumers; a price decrease in one good will make the bundle more attractive.
Let's say that consumers are expecting the price of cell phones to decrease substantially in the future. Due to this information, demand for cell phones will decrease today since consumers would rather wait to purchase at a later date when prices are lower. In contrast, if consumers are expecting the price of cell phones to increase in the future, the demand for cell phones will increase today since consumers would rather pay a lower price for cell phones today.
Determinants of demand mean that there are factors that can alter demand.
The major determinants of demand are the following: consumer taste; the number of buyers in the market; consumer income; price of related goods; consumer expectations.
The five factors that determine aggregate demand are the following: consumer taste; the number of buyers in the market; consumer income; price of related goods; consumer expectations.
When we talk about the determinants of demand, we refer to the factors that affect the demand for that product when the price stays the same (the shifts of the demand curve).
But price affects the quantity demanded of a good or service (movement along the demand curve).
The existence of close substitutes is the most important determinant of the price elasticity of demand for a good.
What is aggregate demand?
Aggregate Demand is the total demand for goods and services in the market.
What are determinants of demand?
Determinants of demand are factors that either positively or negatively affect demand for a good or service in the market.
1. Consumer taste 2. Number of buyers in the market 3. Consumer income 4. Price of related goods 5. Consumer expectations
What are the five determinants of demand?
Consumer taste; the number of buyers in the market; consumer income; price of related goods; consumer expectations.
What are the six determinants of supply?
Resource price; technology; taxes and subsidies; prices of other goods; producer expectations; number of sellers in the market.
Which of the following is NOT a determinant of demand?
number of sellers in the market.
Which of the following IS a determinant of demand?
number of buyers in the market.
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