Other Factors Affecting Demand
- Obviously, it is clear that price has a major effect on the quantity of a product that is demanded
- Price, however, is not the only reason or factor that affect demand
- Three non-price factors that influence the demand for a product are
- Consumer Income
- The prices of other products
- Tastes and Fashion
Consumer Income
- Income obviously has an important influence on whether or not we actually buy a good
- If something is outside the price we are willing to pay, then there will be no effective demand for it
- To be more specific, it is best to look at income in terms of what is left over once tax has been deducted, state benefits are added and the effects of inflation have been taken into account
- This is called real disposable income
- For most young people, disposable income is the allowance that is given after deductions are made
- The ‘real’ element changes the meaning
- For example, if the money you receive increases by 5% over a period of time, but prices rise by 3%, then ‘real’ income has increase by just 2% (5% – 3%)
- If the rise in prices has risen more than the rise in income, then ‘real’ income has actually fallen
- With the aforementioned in mind, the demand for a product will increase as consumers’ income increases
- With more income, consumers have greater spending power, and so buy more of most goods and services
- This is true for most goods, such as cars, TVs, holidays, cinema trips, and so on
- These products are known as normal goods
- In some cases, the relationship between income and demand is inverse
- As income rises, demand for the product fall
- These are known as inferior goods
- This doesn’t mean that these products are of inferior quality
- They are products that are consumed only because more desirable alternative cannot be purchased with available income
- So as income increases, a better alternative can be purchased
- It is difficult to generalise about inferior goods
- What is inferior to one person may be normal to another
- This all depends on a consumer’s income
- Some consumers may regard a holiday to Benidorm as inferior.
- Other people, who have not been able to afford a holiday, will include such a trip as a normal good
- Despite the subjectiveness, products such as supermarket own label goods (compared to recognised brands) can be regarded as inferior goods
- The final outcome is determined by what happens to the total demand for a product following a change in income, not one individual’s demand.
The Prices of Other Products
- The demand for a product can also be affected by a change in the price of another, different product
- Two possible cases are recognised
- These are where there are substitutes and complements to the product in question
- Most products have substitutes.
- They occur when a good or product faces competition from another product
- In such situations, there is competitive demand
- To the economist, there is a relationship between the price of one product and the demand for a substitute
- If the price of a product goes up, then there will be an increase in demand for another product
- Alternatively, if the price for a product falls, then there will be more of a demand for this product, resulting in a fall in demand for the substitute, as this product will no longer be as price competitive
- Complements, on the other hand, tend to be jointly demanded
- If the price of a product increases, then it will lead to the rise in price of another product which is a complement, and a subsequent fall in demand for both of them
- There is therefore an inverse relationship between the price of the complement and the demand for the product that is jointly demanded.
- In order to make rational decisions with respect to demand in general, it is very important that consumers are aware of market prices
- The internet has allowed users to find accurate up-to-date information on a whole range of prices
- This has put on increased pressure on retailers to be competitive
Tastes and Fashion
- Consumer tastes constantly change, and there is obviously demand for a product when it’s to a consumer’s tastes
- If a thing is fashionable, it will be in high demand
- Examples include things like the latest mobile phones, clothing, and holidays.
- Taste, to some extent, is more personal
- Some people may like a particular product, while others may not want to consumer it, irrespective of its price
- A vegetarian, for instance, would never buy beef or chicken
- Advertising has a huge effect on demand, as it affects tastes and fashion
- Informative advertising, where the positive features of a product are promoted, can have a powerful effect on demand.