# Determinants of Demand

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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## Determinants of Demand Definition

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.

## Non-price Determinants of Demand

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.

Fig. 1 - A supply and demand graph

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:

1. Consumer taste
2. Number of buyers in the market
3. Consumer income
4. Price of related goods
5. Consumer expectations

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.

## Determinants of Demand and Supply

Now that we have broken down the definition of determinants of demand, we can take a look at the determinants of demand and supply.

• The determinants of demand are:
1. Consumer taste
2. Number of buyers in the market
3. Consumer income
4. Price of related goods
5. Consumer expectations
• The determinants of supply are:
1. Resource price
2. Technology
3. Taxes and subsidies
4. Prices of other goods
5. Producer expectations
6. Number of sellers in the market

### Determinants of Demands: Effects

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.

• Consumer taste: if consumers like a particular good or service more than before, the demand curve will shift to the right.
• The number of buyers in the market: if the number of buyers in the market increase, the demand will increase.
• Consumer income: if consumers' income increases in the market, the demand will increase for normal goods.
• Price of related goods: an increase in the price of a substitute good will increase the demand for a good. A decrease in the price of a complementary good will also increase the demand for a good.
• Consumer expectations: consumers' expectations of higher prices in the future will increase demand today.

### Determinants of Supply: Effects

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.

• Resource price: if the price of resources used for the production of a good decreases, the supply will increase.
• Technology: if technology improves, supply will increase.
• Subsidies and taxes: if the government subsidizes the good more heavily, supply will increase. If the government increases taxation, supply will decrease.
• Price of other goods: imagine that a firm produces laptops, but also produces alternative goods like cell phones and televisions. If the prices of cell phones and televisions go up, then the firm will increase the supply of the other goods and decrease the supply of laptops. This will occur since the firm will want to take advantage of the higher prices of cell phones and televisions to increase its profit.
• Producers' expectations: usually in the case of manufacturing, if producers expect the price of a good to increase in the future, producers will increase their supply today.
• The number of sellers in the market: if there are more sellers in the market, there will be an increase in supply.

## The Determinants of Aggregate Demand

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.

Fig. 2 - An outward shift of aggregate demand

- Aggregate Demand

## Determinants of Demand Examples

Let's take a look at examples of how determinants of demand can impact demand.

### Consumer Taste

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.

### Consumer Income

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.

### Price of Related Goods

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.

### Consumer Expectations

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 - Key takeaways

• Determinants of demand are factors that either positively or negatively affect demand in the market.
• The five determinants of demand are consumer taste, the number of buyers in the market, consumer income, the price of related goods, and consumer expectations.
• These five factors are the non-price determinants of demand because they affect the demand for a good or service when the price of that good or service remains the same.

#### Flashcards inDeterminants of Demand 13

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What does determinants of demand mean?

Determinants of demand mean that there are factors that can alter demand.

What are the major determinants of 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.

What are the five factors that determine aggregate demand?

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.

Is price a determinant of demand?

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).

What is the most important determinant of the price elasticity of demand for a good?

The existence of close substitutes is the most important determinant of the price elasticity of demand for a good.

## Test your knowledge with multiple choice flashcards

Which of the following is NOT a determinant of demand?

Which of the following IS a determinant of demand?

Determinants of demand affect supply directly.

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