Demand Curve in economics-Factors that influence demand

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Before we know what demand curve is and the shifting of the demand curve we need to understand demand itself.

Demand is defined as the willingness and ability to buy a specific product in a specific quantity at a specific price over a period of time. Demand can be plotted easily in a table or on a graph.

When demand is shown on a graph, it has a peculiar shape that is distinctly known as the demand curve. This demand curve demonstrates the various prices and the demand for the product in respective to it.

Remember when we are discussing demand and analyzing the demand curve, only willingness isn’t important but the buyer should have the ability to buy the product also.

Simultaneously, if the buyer has the ability to buy the product but, is not willing to buy it, even then we don’t consider it while we discuss demand and the demand curve.

The following graph shows the relationship between the various prices of corn and the quantity of corn a particular consumer would be willing and able to purchase at each of these prices.

Demand Curve

In the figure, if the price of corn were $5 per bushel, our consumer would be willing and able to buy 10 bushels per week; if it were $4, the consumer would be willing and able to buy 20 bushels per week; and so forth.

To be meaningful, the quantities demanded at each price must relate to a specific period—a day, a week, a month. Saying “A consumer will buy 10 bushels of corn at $5 per bushel” is meaningless. It is better if we say “A consumer will buy 10 bushels of corn per week at $5 per bushel” to make it more meaningful. Unless a specific time period is stated, we do not know whether the demand for a product is large or small.

LAW OF DEMAND

The whole economy is governed by demand and supply and demand is controlled by Law of Demand that can be easily demonstrated in the demand curve too.

A fundamental characteristic of demand is this: Other things equal, as price falls, the quantity demanded rises, and as price rises, the quantity demanded falls. In short, price and quantity demanded are inversely related to each other. This is why the demand curve always slopes downwards. In economics, this statement is known as the demand curve.

We can also explain the law of demand in terms of income and substitution effects.

Income effect

Income effect suggests that a lower price of a product means an increase in the buying ability of the buyer and thus a relative increase in demand as well. A higher price works oppositely and results in a decrease in demand of the product.

Substitution effect

Substitution effect suggests that a lower price ensures that the product has an edge over its substitutes that are now relatively more expensive. It means the demand for the product will increase automatically. Similarly increasing the price will mean a decrease in own demand and shift of buyers’ interest towards the competitive substitute.

FACTORS THAT INFLUENCE DEMAND CURVE

The demand for a certain product is influenced by not only price but various other factors too. A few of which are

  • Taste
  • Income
  • Price of other related goods
  • Consumer expectations

The following table shows the factors that affect the demand curve of a certain product.

factors that influence demand curve

TASTE

Sometimes, due to advancements in technology and day to day needs, the taste of consumers shift from one product to the other. For example with the introduction of cars in the market, lesser people bought horses or carts afterward.

This ultimately causes a reduction in demand for one product and increase in demand for the other product.

INCOME

Most of the times, increase in income of a household causes a relative increase in demand for that product. Consumers typically buy more steaks, furniture, and electronic equipment as their incomes increase. Conversely, the demand for such products declines as their incomes fall.

For example increase in income causes the buyers to buy more luxury items than they did before.

PRICE OF OTHER RELATED GOODS

A change in the price of a related good may either increase or decrease the demand for a product, depending on whether the related good is a substitute or a complement:

  • A substitute good is one that can be used in place of another good. If the price of a substitute increases the demand of own good also increases and vice versa.
  • A complementary good is one that is used together with another good. When the price of complementary good increases then ultimately the demand of own good decrease and vice versa.

CONSUMER EXPECTATIONS

Changes in consumer expectations may shift demand. A newly formed expectation of higher future prices may cause consumers to buy now in order to “beat” the anticipated price rises, thus increasing current demand.

That is often what happens in so-called hot real estate markets.  Buyers rush in because they think the price of new homes will continue to escalate rapidly. Some buyers fear being “priced out of the market” and therefore not obtaining the home they desire. Other buyers—speculators—believe they will be able to sell the houses later at a higher price.

Whichever their motivation, these buyers increase the current demand for houses.  Similarly, a change in expectations concerning future income may prompt consumers to change their current spending.

For example, first-round NFL draft choices may splurge on new luxury cars in anticipation of lucrative professional football contracts. Or workers who become fearful of losing their jobs may reduce their demand for, say, vacation travel.

 

In summary, an increase in demand—the decision by consumers to buy larger quantities of a product at each possible price—may be caused by:

  • A favorable change in consumer tastes.
  • An increase in the number of the buyers.
  • Rising incomes if the product is a normal good.
  • Falling incomes if the product is an inferior good.
  • An increase in the price of a substitute good.
  • A decrease in the price of a complementary good.
  • A new consumer expectation that either prices or income will be higher in the future.

 

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