Definition
Determinant of demand: any influence on demand other than the good's own price; a change in one shifts the whole demand curve.
- A change in the good's own price moves the buyer along a fixed curve, so it is not a determinant.
- A change in any determinant instead resets the quantity demanded at every price, shifting the whole curve left or right.
- The full mechanics of shifting versus moving along are developed in 2.1.5 and 2.1.7.
Key Idea
- The determinants are the conditions of demand: everything that fixes the position of the curve except the good's own price.
- A favourable change shifts demand right; an unfavourable change shifts it left.
The conditions of demand
Definition
Normal good: a good whose demand rises as income rises.
Inferior good: a good whose demand falls as income rises because buyers switch to preferred alternatives.
Substitute: a good that can be used in place of another, so a rise in one good's price raises demand for the other.
Complement: a good bought and used alongside another, so a rise in one good's price lowers demand for the other.
- Income
- For a normal good higher real income raises demand, because buyers can now afford more: restaurant meals out are a good example. For an inferior good higher income lowers demand as buyers switch to preferred alternatives, so a pay rise makes a commuter drop bus travel for a car.
- Prices of related goods
- A dearer substitute raises demand for the good as buyers switch towards it, so if Pepsi's price rises, demand for Coca-Cola climbs. A dearer complement lowers demand because the two are bought together, so pricier printers pull down demand for ink cartridges.
- Tastes and fashion
- A shift in preferences, including the effect of advertising and branding, moves demand up when the good comes into favour and down when it falls out: a trainer that goes viral on social media sees its demand curve jump right within weeks.
- Population and its structure
- More buyers, or growth in the relevant age group, raises demand because there are simply more people to purchase the good: an ageing population lifts demand for care homes and prescription medicines.
- Expectations
- If buyers expect the price or their income to rise, current demand rises as they bring purchases forward, so drivers who expect petrol to jump next week fill up their tanks today.
- Interest rates and credit
- Lower interest rates make borrowing cheaper and saving less rewarding, raising demand for goods often bought on credit such as cars and housing, since a smaller monthly repayment brings the purchase within reach.
Note
- A fall in the price of games consoles, a complement, raises demand for the games played on them and shifts that curve right.
- A determinant can raise or lower demand, so always state the direction of the resulting shift.
How large is the shift?
- The size of a shift depends on how strongly buyers respond to the condition that changed.
- Some conditions, such as fashion, can shift demand sharply and quickly, whereas demographic change acts only gradually.
- Whether the shift feeds mainly into price or into quantity then depends on the price elasticity of supply, so the market outcome is not automatic; it depends on how quickly firms can expand output.
Exam technique
- Ask what changed: if it is the good's own price it is a movement along the curve, not a determinant.
- If any other condition changed, name it and state the direction of the shift.
- Draw the shift clearly and label the new curve D1.
Common Mistake
- Do not treat a change in the good's own price as a determinant; that only moves the buyer along the curve.
- Do not treat an inferior good like a normal good; for it a rise in income shifts demand left, not right.
Self review
- What distinguishes a determinant of demand from the good's own price?
- Name five determinants of demand.
- How does a rise in income affect demand for an inferior good?
- How does a dearer complement affect demand for a good?
- How do lower interest rates affect demand for goods bought on credit?
