Which of the following best defines determinants of demand

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The determinants of demand are factors that cause fluctuations in the economic demand for a product or a service. A shift in the demand curve occurs when the curve moves from D to D₁, which can lead to a change in the quantity demanded and the price. There are six determinants of demand.

These six factors are not the same as a movement along the demand curve, which is affected by price or quantity demanded. A shift can be an increase in demand, moves towards the right or upwards, while a decrease in demand is a shift downwards or to the left.

A Shift in the Demand Curve

In the diagram above, we see an increase in Demand. This results in the demand curve shifting from D1 to D2. This shift can occur because of any of the determinants of demand mentioned below.

Because of this demand shift, we see an increase in quantity demanded from Q1 to Q2 and an increase in price from P1 to P2.

An increase or decrease in any of these factors affecting demand will result in a shift in the demand curve. Depending on whether it is an inward or outward shift, there will be a change in the quantity demanded and price.

1. Normal Goods

When there is an increase in the consumer’s income, there will be an increase in demand for a good. If the consumer’s income falls, then, there will be a fall in demand.

2. Change in Preferences

If there is a change in preferences, then there will be a change in demand. For example, yoga became mainstream a couple of years ago, and health enthusiasts promoted its benefits. This trend led to an increase in demand for yoga classes.

3. Complementary Goods

When there is a decrease in the price of compliments, then the demand for its compliments will increase. Complementary goods are goods you usually buy together, like bread and butter, tea and milk. If the price of one goes up, the demand for the other good will fall. For example, if the price of yoga classes fell, then there would be an increase in demand for yoga mats.

4. Substitutes

An increase in the price of substitutes will affect the demand curve. Substitutes are goods that can consumers buy in place of the other like how Coca-Cola & Pepsi are very close substitutes. If the price of one goes up, the demand for the other will rise. For example, if meditation classes became more expensive, then there would be an increase in demand for yoga classes.

5. Market Size

If the size of the market increases, like if a country’s population increases or there is an increase in the number of people in a certain age group, then the demand for products would increase. Simply put, the higher the number of buyers, the higher the quantity demanded. For example, if the birth rate suddenly skyrocketed, then there would be an increase in demand for baby products.

6. Price Expectations

When there is an expectation of a price change, this means that people expect the price of a good to increase shortly. These people are then more likely to purchase sooner, which would increase demand for the product. For example, if people are expecting the price of a laptop to fall, then they will delay their purchase until the price lowers.

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The determinants of demand refer to the quantities of a product or service consumers are ready and able to purchase.

Economic demand depends on a number of different variables. For instance, price is a key driver of demand, as there are very few consumers that don’t care about money. Equally, a consumer’s purchasing habits may change if they get a pay rise. In order to measure these fluctuations, economists have identified five key determinants of demand that influence purchase patterns associated with a product or service. In turn, manufacturers and suppliers can study these metrics to manage inventory. Below, we look at these factors in more detail.

1. Income

When an individual's income rises, they can buy more expensive products or purchase the products they usually buy in a greater volume. As a result, this causes an increase in demand. Conversely, if incomes drop, then demand is likely to decrease. Usually, this trend will acutely affect ‘luxury’ markets, such as vacations, cars, or restaurants. Furthermore, products that suffer a fall in demand while incomes rise are referred to as ‘inferior goods’. Although this does not necessarily indicate lower quality, the product’s performance on the market generates a negative demand curve.

2. Price

The laws of supply and demand dictate that if the cost of a particular product rises, demand will decrease. For example, if the price of crude oil goes up, the cost of petrol will rise in gas stations. Therefore, depending on the income of the consumer, they will drive less to conserve gas. This tendency is demonstrated during public holidays, when people will drive shorter distances to visit family or for vacations.

Equally, a change in price can cause demand for a related product to fluctuate. For instance, if we reflect again on the price of crude oil, other products associated with gasoline might rise in price. For example, the cost of train travel may rise as a result of more consumers opting to travel by rail. However, when the price of petrol falls, more people will return to the roads, thus, triggering a drop in the price of train tickets.

3. Expectations, tastes, and preferences

If consumers suspect that the price of a product will rise in future, the demand for said product will increase in the present. For example, if there is a rise in petrol prices forecast for the coming week, motorists will fill up today. Equally, customers’ attitudes, tastes, and preferences can impact demand in ways less directly associated with cost. For instance, if a popular celebrity is involved in marketing a product, demand may increase. Conversely, if a scientific study reports a product is detrimental to your health, demand will drop.

4. Customer base

One of the most important determinants of demand is the size of the market. The more consumers want to purchase a product, the faster demand will rise. Although a rise in population is an obvious way this can happen, there are other factors that influence the size of a customer base. For example, a company may produce a highly effective marketing campaign that introduced their product or service to a new segment.

5. Economic conditions

Consumers’ perceptions of the economy affect their propensity to consume. To illustrate, if consumers are confident their jobs are secure, they are more likely to spend. This tendency is known as consumer confidence. Defined as consumers' feelings about economic conditions, consumer confidence indicates the overall state of the economy. However, if consumer confidence is low, individuals are more likely to put their money into savings accounts – especially if interest rates are high.

The determinants of demand vs determinants of consumption

Economists’ analysis has defined various key determinants of demand and consumption. However, in practice, they often overlook the relationship between demand and price. The development of these ‘gap’ models illustrates the prevalence of an approach that sees demand operating independently of price. In reality, demand is a complex relationship between price and quantity, as opposed to a static notion that only depends on geopolitical factors. As such, manufacturers and suppliers need to study pricing strategy alongside traditional demand dynamics.

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The determinants of demand refer to the quantities of a product or service consumers are ready and able to purchase.

Economic demand depends on a number of different variables. For instance, price is a key driver of demand, as there are very few consumers that don’t care about money. Equally, a consumer’s purchasing habits may change if they get a pay rise. In order to measure these fluctuations, economists have identified five key determinants of demand that influence purchase patterns associated with a product or service. In turn, manufacturers and suppliers can study these metrics to manage inventory. Below, we look at these factors in more detail.

1. Income

When an individual's income rises, they can buy more expensive products or purchase the products they usually buy in a greater volume. As a result, this causes an increase in demand. Conversely, if incomes drop, then demand is likely to decrease. Usually, this trend will acutely affect ‘luxury’ markets, such as vacations, cars, or restaurants. Furthermore, products that suffer a fall in demand while incomes rise are referred to as ‘inferior goods’. Although this does not necessarily indicate lower quality, the product’s performance on the market generates a negative demand curve.

2. Price

The laws of supply and demand dictate that if the cost of a particular product rises, demand will decrease. For example, if the price of crude oil goes up, the cost of petrol will rise in gas stations. Therefore, depending on the income of the consumer, they will drive less to conserve gas. This tendency is demonstrated during public holidays, when people will drive shorter distances to visit family or for vacations.

Equally, a change in price can cause demand for a related product to fluctuate. For instance, if we reflect again on the price of crude oil, other products associated with gasoline might rise in price. For example, the cost of train travel may rise as a result of more consumers opting to travel by rail. However, when the price of petrol falls, more people will return to the roads, thus, triggering a drop in the price of train tickets.

3. Expectations, tastes, and preferences

If consumers suspect that the price of a product will rise in future, the demand for said product will increase in the present. For example, if there is a rise in petrol prices forecast for the coming week, motorists will fill up today. Equally, customers’ attitudes, tastes, and preferences can impact demand in ways less directly associated with cost. For instance, if a popular celebrity is involved in marketing a product, demand may increase. Conversely, if a scientific study reports a product is detrimental to your health, demand will drop.

4. Customer base

One of the most important determinants of demand is the size of the market. The more consumers want to purchase a product, the faster demand will rise. Although a rise in population is an obvious way this can happen, there are other factors that influence the size of a customer base. For example, a company may produce a highly effective marketing campaign that introduced their product or service to a new segment.

5. Economic conditions

Consumers’ perceptions of the economy affect their propensity to consume. To illustrate, if consumers are confident their jobs are secure, they are more likely to spend. This tendency is known as consumer confidence. Defined as consumers' feelings about economic conditions, consumer confidence indicates the overall state of the economy. However, if consumer confidence is low, individuals are more likely to put their money into savings accounts – especially if interest rates are high.

The determinants of demand vs determinants of consumption

Economists’ analysis has defined various key determinants of demand and consumption. However, in practice, they often overlook the relationship between demand and price. The development of these ‘gap’ models illustrates the prevalence of an approach that sees demand operating independently of price. In reality, demand is a complex relationship between price and quantity, as opposed to a static notion that only depends on geopolitical factors. As such, manufacturers and suppliers need to study pricing strategy alongside traditional demand dynamics.