Determinants of Demand
Definition: The determinants of demand are factors that cause fluctuations in the economic demand for a product or a service. These are:
1. Consumer preferences: personality characteristics, occupation, age, advertising, and product quality, all are key factors affecting consumer behavior and, therefore, demand.
2. Prices of related products: an increase in the price of one product will cause a decrease in the quantity demanded of a complementary product. In contrast, an increase in the price of one product will cause an increase in the demand for a substitute product.
3. Consumer income: the higher the consumer income, the higher the demand and vice versa.
4. Consumer expectations: expectations for a higher income or higher prices increase the quantity demanded. Expectations for a lower income or lower prices decrease the quantity demanded.
5. The number of buyers: the higher the number of buyers, the higher the quantity demanded, and vice versa.
6. Other factors: the weather and governmental policies that may expand or contract the economy affect the demand for particular products or services.
Letís look at an example.
Chris wants to fuel his car. At the gas station, he realizes that the gas prices have skyrocketed to $5 a gallon. Chris faces some income problems lately because he lost his job. Therefore, he cannot afford to pay a high gas price. What is Chris going to do?
Because Chrisí car runs on gas and he cannot replace it with a substitute good that would be a car running on electricity, Chris decides to spend less on a complementary good such as tires. So, the next time Chris changes tires, he will buy cheaper tires to trade off for the increase in the gas.
What if Chris thinks that the price of gas will increase further?
If Chris expects that the price of gas will rise, he is more likely to put gas in his car more often. Instead of filling the car every week, he will start filling it every other day to take advantage of the price of gas today.
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