Determining Factors of the demand

Introduction
We can define the demand like the capacity and desire to buy certain amounts of a good at different levels
from price in a specific period of time, being constant the rest of the other factors.
The demanded amount of a good is the amount that the consumers want and can buy. Through the demand we
can examine the conduct of the buyers, and the relation with the salesmen on the market. On the market we
can interchange a product with a determined price by the interaction of the supply and the demand.
Determining Factors of the demand
In addition to the price of a good, the demanded amount depends on other factors like the following ones:
The rent: a reduction of the rent means that we would have less to spend, reason why it would be necessary to
diminish the demand of some goods. For most of the goods, the rent diminishes the demanded amount of the
good diminishes as well. These goods are denominated normal goods.
But not all the goods are normal. If the demand of a good increases when the rent diminishes it will
denominate inferior goods.
The prices of other goods: When the reduction of the price of a good reduces the demand of another one, both
are denominated substitutes goods (jerseys and sweater shirts)
When the reduction of the price of a good elevates the demand of another one, they are denominated
complementary goods (gasoline and automobiles, computers and software)
Taste of the consumer: The most evidential determination of our demand is taste or preferences. The
economists normally do not try to explain the consumers taste because they are based on historical and
psychological issues that are outside the field of economy. Nevertheless, they examine what happens when
pleasures change.
The expectations: Our expectations of the future can influence our present demand of a service. For example,
if we expect to gain higher rent the next month, it is possible we will spend more in the present.
The Market of compact disc of music
Last year, hundreds of million of virgin CDs were sold to be recorded. One part went to enrich the private
business, but the most important one to be mentioned consumers. Formerly, the vinyl disc was "the original
one", and although it was possible to be copied to cassette, was not preemtive. With compact discs, the
situation is completely different: the computerized masterizaciones and the engravers of CDs guarantee
identical copies to the original one.
The original disc and the copy have a single substantial difference: the price
In order to study the behavior of the consumers I will use an example, namely the market of compact disc of
music. How do consumers decide how many CDs are they going to buy in a month and what factors influence
their decision?
The rent: What would happen with the demand of CDs if someone has a summer job only, it is most probable
it is that the demand of CDs diminishes the rest of the year.
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The prices of other goods: Let us assume a low the price of mini disc. The law of demand affirms that if the
price of mini disc is low we will buy more mini disc. Compact disc and mini disc reproduces music, so that
demand of CDs will decrease. Now, if the price of the reproducers of CDs low, we will buy more reproducers
according to the law of demand. Nevertheless, in this case we will buy more CDs because these two goods are
used together.
The tastes of the consumer: If we like all type of music, we will buy more CDs as if we like of only one group
or one singer.
The expectations: If we hoped to find a job or to earn more in our present job it is possible that we use more of
our money to buy CDs at the present time.
The price:
In this table demand represents the monthly amounts of CDs bought per consumer in relation with the price of
one CD.
Price of a CD (in Pounds)
6
8
10
12
15
17
19
21
Demanded amount of CDs
(monthly)
10
9
8
7
6
5
4
3
In the table it is possible to be observed that if the price rises, the consumer will buy an inferior amount of it.
We can represent the numbers of the table with a graphic. The black line relates the price and the demanded
amount and it is called demand curve.
The curve of demand has the following form:
Price
of CDs
A
£ 15,00
D
0
6
Quantity of CDs
2
The graph shows that if we increase the price demanded, the amount diminishes. The previous table is about
an individual consumer demand, but on the market there are many consumers, which is the reason for the
necessity to do the curve of the demand of the market. That is obtained as adding the individual demands of
all the consumers who belong to the market.
The table of the demand of the market would be the following:
Price of a CD
(in Pounds)
6
8
10
12
15
17
19
21
Demanded amount Demanded amount Demanded amount Demanded amount
of CDs (monthly) of CDs (monthly
of CDs (monthly
of CDs (monthly)
C−1
10
9
8
7
6
5
4
3
C−2
8
7
6
5
4
3
2
1
C−3
12
11
10
9
8
7
6
5
MARKET
32
27
24
21
18
15
12
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Therefore, the demanded amount is related negatively to the price of the good. This relation is certain for most
of the goods of the economy and the economists call it law of the demand: keeping all the other factors
constant, when the price of good raises, the demanded amount diminishes.
Reasons of this are:
• The first effect is denominated by substitution, and means that whenever the price of a good raises
(e.g. compact disc) the consumer can buy another one cheaper to replace the other one and it can
cover the same necessity; tapes of cassette, for example.
• The second reason is effect rents. If the price of the CDs rises, but not my rent, my spending power
and my demand of that good is low.
Determinants of the demand
Variables that affect the demanded
amount
Price
Rent
Prices of other goods
Tastes of the consumer
Expectations
Number of buyers
A variation of this variable produces:
Movement throughout the demand curve
Moves the demand curve
Moves the demand curve
Moves the demand curve
Moves the demand curve
Moves the demand curve
Movements throughout the demand curve:
The demand curve represents what happens with the demanded amount of CDs when only the price changes:
the rent, the taste and expectations of the consumer and the prices of products related to the CDs do not
change. It is important to remember what is fixed and what does not.
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Graphically, when the price of a good changes we move from a point to another one throughout the demand
curve, because the demanded amount changes.
In the following graph we can observe what happens when the price of a good decreases or increases.
Price
of CDs
A PRICE DECREASE
£ 15,00
£ 10,08 B
D
068
Quantity
of CDs
Price
of CDs
£19,32 A
B PRICE INCREASE
£ 15,00
D
046
Quantity
of CDs
Shift of the demand curve
Whenever any factor of demand, not the price, varies, the demand curve moves. Any change that elevates the
amount demanded, independent from the prices, moves the demand curve to the right. Also, any change that
reduces the demanded amount, independent from the prices, moves the demand curve towards the left.
Price
of CDs
A PRICE DECREASE
4
£ 15,00
B
D2 D1
046
Quantity
of CDs
Price
of CDs
PRICE INCREASE
£ 15,00 B
A
D2
D1
0
6 8 Quantity
of CDs
The demand curve moves of D1 to D2, with which the demanded amount increases or diminishes such to
prices. The displacement of the curve is parallel as much towards the right as towards the left.
The elasticity of the demand
The elasticity of the demand is moderate calculating the percentage in which it varies the demanded amount
of a good when its price varies in one percent. If the result of the operation is greater than one, the demand of
that good is elastic; if the result is between zero and one, its demand is inelastic.
The factors that influence in which the demand of a good is more or less elastic are:
Type of necessities that the good satisfies. If the good is of first necessity the demand is non−variable, it is
acquired to what price is like. However if it is a luxury good the demand will be variable because if the price
increases slightly many consumers will be able to do without it.
Substitute goods. If good substitutes exist the demand of the good will be very variable.
Importance of the good depending the cost. If the cost of the good means a very small percentage of the
salary of the individuals, its demand will be inelastic. The variations in its price influences very little in the
decisions of the consumers who wish to acquire them.
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The passage of time. For almost all the goods, the greater it is the period of considered time the greater will
be the variability of the demand. If the price of the gasoline increased, its consumption does not vary much,
but after some time it could be replaced in some of its uses by coal, in other uses by alcohol, so that the
diminution in the demand only notes when time passes by.
The price. Finally it is necessary to consider that the elasticity of the demand is not the same one throughout
the whole curve. It is possible that for high prices the demand is less elastic than when the prices are lower or
the other way around, depending on the enquired product.
Elasticity
Price Reduction
Price Increase
Demand is Price
Elastic: |ðp| > 1.0
Expenditure
increases
Expenditure
decreases
Demand is Price
Inelastic: |ðp| < 1.0
Expenditure
decreases
Expenditure
increases
Price Elasticity of Demand
An important characteristic of demand is the relationship among market price, quantity demand and consumer
expenditure. The nature of demand is such that a reduction in market price will usually lead to an increase in
quantity demanded.
Given that consumer expenditure is the product of these two variables, the effect of a price reduction will have
an uncertain impact on this expenditure. In some cases a reduction in price will be more than offset by a large
increase in quantity demanded −− a situation where demand is price sensitive or price elastic.
Price
The Elastic Demand
0 Quantity
(Price
) (Qdemanded
) = Expenditure
In other cases, the reduction in price is proportionally smaller than the change in quantity −− a situation where
demand is price insensitive or price inelastic.
Price
The Inelastic Demand
0 Quantity
(Pmkt
) (Qdemanded
) = Expenditure
Bibliography:
Business Basics (1997), Economics (2nd ed), BPP Publishing
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Nellis, J D Parker (1996), The Essence of The Economics (2nd ed)
Pulido San Roman,Antonio: Guidebook to understand the Economics
−Internet:
Web Ec − www.resourcesineconomics
www.digitaleconomist.com
Economics Interactive tutorial Supply and Demand
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