Demand: Determinants of Demand

This section explores the factors that influence the demand curve, causing shifts to the left or right. Understanding these determinants is crucial for analyzing market changes and predicting price and quantity movements.

1. Consumer Income

The relationship between consumer income and demand for most goods is positive. Goods with a positive income elasticity of demand are known as normal goods. As income rises, demand for normal goods increases. Conversely, demand for inferior goods (negative income elasticity) decreases as income rises.

• Normal Goods: Demand increases as income increases.
• Inferior Goods: Demand decreases as income increases. Examples include generic brands or used goods.

Income Elasticity of Demand (YED): This measures the responsiveness of quantity demanded to a change in income. It's calculated as: $$YED = \frac{\text{Percentage change in quantity demanded}}{\text{Percentage change in income}}$$

Good Type	Income Elasticity
Normal Goods	Positive
Inferior Goods	Negative

2. Consumer Tastes and Preferences

Changes in consumer tastes and preferences can significantly impact demand. This can be due to advertising, fashion trends, health concerns, or any other factor that alters what consumers desire.

Example: A sudden increase in the popularity of plant-based diets will increase the demand for plant-based meat alternatives.

3. Prices of Related Goods

The demand for a good is affected by the prices of goods that consumers use in conjunction with it. These are known as related goods.

• Substitute Goods: Goods that can be used in place of each other. If the price of a substitute good increases, demand for the original good will increase. (e.g., Coffee and Tea)
• Complementary Goods: Goods that are often used together. If the price of a complementary good increases, demand for the original good will decrease. (e.g., Cars and Petrol)

4. Consumer Expectations

Consumer expectations about future prices, income, or availability can influence current demand. For example, if consumers expect prices to rise in the future, they may increase their current demand.

Example: If there's an expectation of a recession, consumers might reduce their current spending, leading to a decrease in demand for discretionary items.

5. Population Size and Composition

A larger population generally leads to higher demand for most goods and services. Changes in the population's age distribution can also affect demand. For example, an aging population may increase demand for healthcare services.

6. Advertising and Marketing

Effective advertising and marketing campaigns can create or alter consumer preferences, leading to increased demand for a product. This can shift the entire demand curve to the right.

7. Government Policies

Government policies, such as taxes, subsidies, and regulations, can influence demand. For example, a tax on cigarettes will decrease demand, while a subsidy for electric vehicles will increase demand.

Summary

These factors collectively determine the shape and position of the demand curve. Changes in any of these factors will cause the demand curve to shift, leading to changes in the equilibrium price and quantity.