3.4 Determinants of Demand
Notes
Factors other than the good's own price shift the demand curve.
- Income: for a normal good, demand rises when income rises (restaurant meals, new cars). For an inferior good, demand falls when income rises (store-brand noodles, used clothing).
- Prices of related goods: substitutes are used in place of each other (coffee and tea); if the price of one rises, demand for the other increases. Complements are used together (printers and ink); if the price of one rises, demand for the other decreases.
- Tastes and preferences, often changed by advertising, trends or new information.
- Consumer expectations about future prices or income: if people expect a price to rise next month, demand rises now.
- Number of buyers: population growth or new markets increase demand.
| Event | Effect on demand for hot dog buns |
|---|---|
| Price of hot dogs rises (complement) | decreases, shifts left |
| More people move to town | increases, shifts right |
| Buns become trendy | increases, shifts right |
Practice
The price of gaming consoles rises sharply. What happens to demand for video games designed for those consoles?
Fewer consoles are bought, so fewer people want games to play on them.
When Jen's income rises, she buys fewer bus rides and more rides in ride-share cars. For Jen, bus rides are:
Demand for an inferior good falls as income rises.
News reports say that the price of gasoline will jump next week. What is the most likely effect today?
Expecting higher future prices, buyers fill up now, shifting today's demand right.
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