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Determining the Components of Demand
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Demand is the behavior of consumers in the market.
The components, or determinants, of demand for a product are the price
of the good, the price of complementary goods, the price of substitute
goods, household income, tastes and preferences, and expectations about
future prices.
A demand function is a mathematical relationship that predicts the
quantity of a good demanded as a function of several related factors.
Ceteris paribus means “all other things equal.” It means that in a functional
relationship, all factors but one are held constant.
Demand refers to the behavior of
consumers in the market. Supply
refers to the behavior of producers.
The question that you want to answer
in this example is which factors
determine how much of a product that
you, as a consumer, will demand.
Usually the answer to this question is
expressed as a demand function.
The demand function is expressed
using symbols. You can read the
function on the left as:
“The quantity of bread demanded in a
particular time period is a function of
the price of bread, the price of
complementary goods, the price of
substitute goods, household income,
consumer tastes and preferences, and
expectations about future prices.”
Economists use the assumption
ceteris paribus to study the effects of
one variable while holding the others
constant. If you hold all components
constant, except the price of bread
itself, you can develop a demand curve
that shows the relationship between
the price of bread and the quantity of
bread demanded in a period of time.
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1160.doc –rev 11/07/2006