Determinants

of
Demand
 Determinants of Demand

1. Price of the product

2. Income
3. Number of buyers
4. Accumulated wealth
5. Prices of related products
6. Tastes and preferences
7. Expectations about future income,
wealth, and prices.
 Income and Wealth

• Income is the sum of all households

wages, salaries, profits, interest
payments, rents, and other forms of
earnings in a given period of time.

• Wealth, or net worth, is the total

value of what a household owns
minus what it owes.
 Related Goods and Services

• Normal Goods are goods for which

demand goes up when income is
higher and for which demand goes
down when income is lower.
• Inferior Goods are goods for which
demand falls when income rises.
 Related Goods and Services

• Substitutes are goods that can serve as

replacements for one another; when the
price of one increases, demand for the
other goes up. Perfect substitutes are
identical products.

• Complements are goods that “go

together”; a decrease in the price of one
results in an increase in demand for the
other, and vice versa.
Shift of Demand Versus Movement Along a
Demand Curve

• A change in demand is
not the same as a change
in quantity demanded.
• In this example, a higher
price causes lower
quantity demanded.
• Changes in determinants
of demand, other than
price, cause a change in
demand, or a shift of the
entire demand curve, from
DA to DB.
A Change in Demand Versus a Change in Quantity
Demanded

• When demand shifts to

the right, demand
increases. This causes
quantity demanded to be
greater than it was prior to
the shift, for each and
every price level.
A Change in Demand Versus a Change in Quantity
Demanded

To summarize:
Change in price of a good or service
leads to

Change in quantity demanded

(Movement along the curve).

Change in income, preferences, or

prices of other goods or services
leads to

Change in demand
(Shift of curve).
 The Impact of a Change in Income

• Higher income • Higher income

decreases the demand increases the demand
for an inferior good for a normal good
 The Impact of a Change in the Price
of Related Goods
• Demand for complement good
(ketchup) shifts left

• Demand for substitute good (chicken)

shifts right

• Price of hamburger rises

• Quantity of hamburger
demanded falls
 Summary of Effects on Demand

• Favorable change in taste and preferences –

shift to the right
• Unfavorable change in taste and preferences
– shift to the left
• Increase in price of substitute – shift to the
right
• Decrease in price of substitute – shift to the
left
• Decrease in price of complement – shift to
the right
• Increase in price of complement – shift to
the left
 Summary of Effects on Demand

• Increase in number of buyers – shift to the

right
• Decrease in number of buyers– shift to the
left
• Increase in expected income– shift to the
right
• Decrease in expected income– shift to the
left
• Increase in income (normal goods) – shift to
the right
• Increase in income (inferior goods) – shift to
the left
 Determine the behavior of the
demand curve for guyabano shake

Shift to the 1. A study proves that guyabano can

right cure cancer and is good for one’s
health.
No shift 2. The price of sweetener increases
Shift to the 3. The price of mango shake
left decreases.
Shift to the 4. Consumers’ income falls and
left guyabano is a normal good.
Shift to the 5. The number of cancer patients
left doubles.
 From Household to Market Demand

• Demand for a good or service can be

defined for an individual household, or
for a group of households that make up a
market.

• Market demand is the sum of all the

quantities of a good or service demanded
per period by all the households buying in
the market for that good or service.
 From Household Demand to Market
Demand

$4.00
G
(1)
Price per
(2) (3) (2) (3)
Alice’s Bruce’s Cathy’s Market
3.50
cassette demand demand demand demand F
3.00

Price per cassette (in dollars)

E
A $.0.50 9 6 1 16 2.50
D
B 1.00 8 5 1 14 2.00
C 1.50 7 4 0 11 C
1.50
D 2.00 6 3 0 9 B
E 2.50 5 2 0 7 1.00
A
F 3.00 4 1 0 5 0.50
G 3.50 3 0 0 3 Cathy Bruce Alice
2 0
H 4.00 2 0 0 2 4 6 8 10 12 14 16
Quantity of cassettes demanded per week
End