WHAT ARE THE DETERMINANTS OF DEMAND? - ECONOMY - 2024

Some of the determinants of demand are the price of the product, consumer income, the price of complementary goods or services, the price of substitute products or consumer taste, among others.

In economics, demand refers to the amount of products and services that are purchased by consumers at a certain price in a certain period of time. Also, demand is the consumer's need or desire to purchase a certain product or service.

Supply and demand graph

The previous concept shows that demand is the axis on which the economy revolves, since the more quantity of products a consumer demands, the greater the production of said product.

Without the demand, no company would worry about producing, which would mean the economic system's unemployment. The most effective way to understand how determinants affect demand is to assume that only one determinant varies at a time.

This principle is known as ceteris paribus, which means in Latin "all other things remain unchanged." Next, it is presented how each determinant affects demand individually (ceteris paribus).

Main determinants of demand

Price of a good or service

The relationship between the price of a good or service and demand can be observed in the law of demand. This economic principle states that if the price of a product increases, fewer people will want to buy it, that is, the demand decreases.

The same is true in reverse: if the price of a product falls, more consumers will want to buy it, increasing demand for it.

Demand curve. On the y-axis is the price of the product. On the x-axis, is the quantity demanded. The lower the price, the greater the quantity demanded. / Photo recovered from economicshelp.org.

However, since price is not the only element that affects demand, the law of demand will only apply if the other determinants do not vary.

Consumer income

If the consumer's income increases, he will be able to buy more products. However, if an individual's income is doubled, this does not mean that they will necessarily buy twice as many products.

The first product satisfies the need and the second ensures that the need has actually been satisfied; from here, marginal utility comes into play.

Marginal utility is defined as the degree of satisfaction or happiness that a good generates. The law of diminishing utility indicates that if an individual consumes additional units of a good, there will come a point where the good will not satisfy the consumer but will generate inconvenience.

For example, a glass of ice cream is delicious the first time it is consumed, a second glass of ice cream could also be satisfying, but ten glasses would be disgusting, they could even make the consumer sick.

On the other hand, if the consumer has really high incomes, he will be able to buy higher priced products, also increasing the demand for the expensive products.

Price of complementary goods

Complementary assets are those that are required for the operation of another asset. For example, gasoline is a complementary good for cars. Another example of a complementary good is ink and paper for printers.

The increase in the prices of complementary goods generates an increase in the money that must be invested for the use of the demanded product.

For example, if the price of gasoline increases dramatically, the demand for cars will decrease.

Price of substitute products

A substitute product is one that can satisfy the need generated by another good in demand.

For example, margarine is a substitute for butter; If the price of margarine falls, the demand for the substitute will increase, while the demand for butter will decrease. If the price of the substitute increases, the opposite reaction will occur.

Another example of a good substitute is Samsung phones, which replace iPhones.

However, the Apple company continually innovates its products; In this way, if a new Samsung phone comes on the market that seeks to replace iPhones or iPods, Apple launches an improved product in order to stop Samsung from being a substitute.

Consumer taste

When the preferences of a group of consumers are directed towards a certain product, the demand for this product increases.

Companies try to attract the attention of consumers through advertising. For example, Coca-Cola has attracted the attention of consumers thanks to its creative and inspiring commercials, making this drink preferred over others available in the market.

Expectation that the prices of a good will increase

When people expect the price of a good to increase, they tend to buy more of this product as an investment (since in the future they will be able to resell it for a higher price than they paid for it), which increases demand.

For example, if house prices rise, people will want to buy them as it will be a formidable investment.

Number of active buyers in the market

The number of consumers affects aggregate demand. The more consumers enter the market, the greater the chance that demand will increase.

Other factors affecting demand

There are other factors that affect demand, among which the quality of the product and the climate stand out.

Product quality

The quality of a product increases the demand for it, regardless of its price, since if an expensive product of good quality will last longer than a cheap product of low quality.

Weather

The weather causes the demand for certain products to increase or decrease. For example, during the summer, the demand for vacation-related products (swimwear, floats) increases.

However, in winter, the demand for these products decreases, while the demand for coats, sweaters, scarves, among others, increases.

References

1. Basic Elements of Supply and Demand. Retrieved on June 6, 2017, from highered.mheducation.com.
2. Five Determinants of Demand with Examples and Formula. Retrieved on June 6, 2017, from thebalance.com.
3. What is the Law of Demand in Economics? Definition & Examples.. Retrieved on June 6, 2017, from study.com.
4. What is Demand: Definition, Explanation, Effect. Retrieved on June 6, 2017, from thebalance.com.
5. What is Demand? Retrieved on June 6, 2017, from investorwords.com.
6. What is demand? Retrieved on June 6, 2017, from busineslsdictionary.com.