Download Determinants of Demand

Review
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Law of Demand:
Income Effect:
Substitution Effect:
Diminishing Marginal Utility:
Changes in Demand
• Demand Shifts: Time allows
factors other than price to influence
demand significantly.
• In Economics these factors can
shift the entire demand curve of a
product to the right or to the left.
Changes in Demand
Determinants of Demand — Factors that
can cause the entire demand curve to shift
to either the right or left.
1.
2.
3.
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5.
Consumer tastes and preferences
Income
Market size - # of buyers
Future expectations
Price of related goods
Determinants of Demand
1. Consumer Tastes and Preferences:
Changes in consumer tastes and
preferences can affect demand for a
product at all possible prices.
Businesses use advertising to influence
demand through consumer tastes and
preferences.
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Bandwagon
Testimonial
Snob Appeal
Wit and Humor
Many more
Determinants of Demand
• 2. Income—Higher incomes generally
allows people to spend more money for
goods and services which causes the
demand curve to shift to the right.
• Normal Goods I
D
• Inferior Goods
I
D
Determinants of Demand
3. Market Size—The size of a market tends
to affect demand when markets expand
and contract.
An increase in the number of buyers leads
to an increase in demand for most
products.
M
D
Determinants of Demand
• Government Policy can affect size of
markets
• China trade policy example
• Baby Boomers example
Determinants of Demand
• 4. Future Expectations—Your
expectations for more future income
influences your purchases today.
–Ex. Anticipate a raise in your salary
OR
–If you anticipate being laid off !
Determinants of Demand
5. Price of Related Goods—A
change in a products price can affect
demand for related goods
and services
Complementary Goods—Goods that are
commonly used with other goods. P D
Substitute Goods – Goods that are used in
place of another good P
D
Determinants of Demand
Complimentary Goods
– Paint / Paintbrushes
P
D
– Price of paint increases
– Demand for paintbrushes (complimentary good)
decreases
– Shifts curve to the left
Substitute Goods
• Paint / Wallpaper
P
D
•Price of paint increases – demand for
wallpaper (substitute good) increases