Determinants of Demand: Income, Related Goods, Tastes, Population, and Expectations

Introduction to Determinants of Demand

• The textbook section on determinants of demand is available on Google Classroom for further reading.

1. Income

• Definition: Income primarily relates to a consumer's ability to purchase goods and services.

• Impact on Demand: The effect of income on the demand curve depends on the type of good.

• Types of Goods based on Income Relationship:

  • Inferior Goods:

    • Definition: Goods for which demand decreases as income increases and increases as income decreases.

    • Relationship with Income: Inverse relationship.

    • Example: Nokia phones (if a consumer has low income, Nokia is a desirable, affordable purchase; if income is high, desire decreases).

    • Graphical Effect:

      • Higher income leads to lower demand, shifting the demand curve to the left.

      • Lower income leads to higher demand, shifting the demand curve to the right.

  • Normal Goods:

    • Definition: Goods for which demand increases as income increases and decreases as income decreases.

    • Relationship with Income: Positive (direct) relationship.

    • Example: iPhones (if a consumer has high income, iPhone is a desirable product due to perceived quality/value; if income is low, desire decreases).

    • Graphical Effect:

      • Higher income leads to higher demand, shifting the demand curve to the right.

      • Lower income leads to lower demand, shifting the demand curve to the left.

  • Luxury Goods:

    • Definition: A specific type of normal good where the positive relationship with income is much stronger. Demand for luxury items is significantly impacted by very high income.

    • Relationship with Income: Positive (direct) relationship, but with a much stronger sensitivity to income changes compared to normal goods.

• Note on Non-Price Determinants: Changes in income are considered non-price determinants because the price of the good itself does not change; rather, the quantity demanded at every price level is affected, leading to a shift of the entire demand curve.

2. Price of Related Goods

• Changes in the price of one good can affect the demand for another good, depending on their relationship.

• Types of Related Goods:

  • Substitutes:

    • Definition: Goods that offer similar utility or benefit and can be replaced by one another.

    • Relationship: Direct relationship. An increase in the price of one good leads to an increase in the demand for its substitute.

    • Examples: Pepsi and Coke; Nike, Adidas, Asics, New Balance, Under Armour shoes.

    • Graphical Effect: If the price of Pepsi increases (P{Pepsi} ightarrow ext{increase}), there is a movement along Pepsi's demand curve (contraction). Consequently, the demand for Coke increases (D{Coke}
      ightarrow ext{increase}), causing Coke's demand curve to shift to the right.

  • Complements:

    • Definition: Goods that are typically consumed together.

    • Relationship: Inverse relationship. An increase in the price of one good leads to a decrease in the demand for its complement.

    • Examples: Tea and sugar/milk/honey; shoes and socks; phone and charger; burger and fries.

    • Graphical Effect: If the price of sugar increases (P{Sugar} ightarrow ext{increase}), the demand for tea (which is a complement) decreases (D{Tea}
      ightarrow ext{decrease}), causing tea's demand curve to shift to the left.

3. Taste and Preferences

• Definition: Consumer likes, dislikes, and evolving trends for a product.

• Impact on Demand: Tastes and preferences develop over time and are heavily influenced by popularity and trends.

• Examples: Popular memes (like