Explain why buyers want more or less at the same price.
A demand determinant changes willingness or ability to buy at a given own price. Income, tastes, the number and composition of buyers, related-good prices and expectations can therefore shift demand. First name the market, then hold its own price constant while explaining the change. An income rise increases demand for a normal good but decreases demand for an inferior good. A rise in a substitute's price tends to increase demand for this good; a rise in a complement's price tends to decrease it. These labels describe behaviour in a particular context, not permanent judgements about quality.
- Normal and inferior goods
- For a normal good, higher income raises demand at each own price. For an inferior good, higher income lowers demand. These labels describe buyers' behaviour, not whether a product is good quality.
- Substitutes and complements
- Substitutes can be used instead of one another: dearer tea can raise demand for coffee. Complements are used together: dearer cinema parking can reduce demand for cinema tickets.
- Other determinants
- Tastes, the number and type of buyers, and expectations can change purchases at an unchanged own price. The effect depends on how buyers respond; a prediction of a future price rise may encourage buying now.
Demand determinants and their mechanisms
Income
Higher income raises demand for a normal good and lowers demand for an inferior good, other things equal. The classification can differ between consumers and income ranges.
Tastes and preferences
A stronger preference increases willingness to buy at a given price, shifting demand right. Advertising or new information shifts demand only if it changes buyer behaviour.
Number and composition of buyers
More potential buyers with willingness and ability to pay can increase market demand. An ageing population may increase demand for some goods and reduce it for others; connect the demographic change to the particular market.
Substitutes
Goods used in place of one another. A rise in the price of one can shift demand for the other right as buyers switch. Name the substitute and explain the switching, rather than assuming any two goods are substitutes.
Complements
Goods used together. A rise in one good's price can reduce purchases of the pair and shift demand for the other left. Keep the market you are analysing explicit.
Expectations
An expected future price rise may bring purchases forward, increasing current demand, if buyers can store the good or buy early. An expected price fall may encourage delay. Expected income changes can affect current demand if buyers alter current spending; access to credit and uncertainty matter.
Worked example: Three separate changes in the cinema market
Consider cinema tickets sold in a town each month. Assume a downward-sloping demand curve, upward-sloping supply curve and flexible prices. Analyse each event separately, starting from the same initial equilibrium.
- Residents' incomes rise. If cinema visits are a normal good for these buyers, they want more tickets at each ticket price: demand shifts right. With supply unchanged, equilibrium ticket price and quantity rise.
- The price of a streaming service rises. If buyers treat streaming and cinema visits as substitutes, cinema demand shifts right. This is another good's price changing, not a movement along cinema demand.
- Parking near the cinema becomes more expensive. If parking and cinema visits are complements for these buyers, the total cost of a visit rises and cinema demand shifts left. With supply unchanged, equilibrium ticket price and quantity fall.
- If all three events occur together, two push demand right and one pushes it left. Their relative effects are needed to determine the net shift; counting the number of causes is insufficient.
Watch out for this
Higher income always raises demand, and a cheaper good must be inferior.
Inferior means demand falls as income rises, other things equal. Low price or low quality alone does not establish that relationship. Use information about buyers' responses rather than assuming every good is normal.
Check your understanding
For a particular group of buyers, second-hand desks are an inferior good. Their incomes fall while desk prices and other demand determinants stay unchanged. What happens?
- Demand for second-hand desks shifts left.
- Demand for second-hand desks shifts right.
- Quantity demanded moves down the unchanged demand curve.