Demand: Key Determinants (Last-Minute Review)

Factors Affecting Demand

• Demand does not solely depend on price; other factors affect it, such as:

  • Consumer income

  • Prices of other products

  • Taste or preference

  • Expected events

  • Number of consumers

  • Example: animal disease (e.g., in pigs) that can reduce demand for meat even if the price drops

Income and Demand

• Income or salary determines purchasing power; an increase in income can have:

  • Positive effect: can increase demand for many products

• Normal goods vs. Inferior goods:

  • Normal goods: demand ↑↑ when income ↑↑ (e.g., rice)

  • Inferior goods: demand ↑↑ when income −− (or −− when income ↑↑)

Other Factors Affecting Demand

• Prices of Related or Substitute Products

  • Substitute goods: when the price of one product increases, the demand for its substitute increases (e.g., tuna and sardines)

  • Complementary goods: when the price of one product increases, the demand for the other product, which is usually used with it, also decreases (e.g., cell phone and SIM card)

Personal Taste

• Taste or preference changes demand

  • Can be affected by season and advertisements

  • Example: hot weather →→ higher demand for halo-halo; new advertisement →→ fans are prompted to buy a product

Expected Events

• Conditions or events that can change demand

  • News, occasions, weather

  • Example: news about African swine fever (2019) and Bureau of Quarantine restrictions on meat entry; during Christmas/celebrations, demand for lanterns, decorations, food increases

Number of Consumers

• More consumers →→ higher demand

  • Example: a class of 3030 students, five students transferred →→ additional demand for 55 products/services

• The number of consumers can increase when a product becomes trendy or follows a fad (bandwagon effect)

  • Bandwagon effect: people's tendency to do or buy something because many others are doing or believing the same thing

Number of Consumers and Favorable Trends

• Demand can also increase when a product is popular or trendy

• Weakness: not every price increase is accompanied by an increase in demand for an alternative; substitution and complementarity act depending on the situation

Quick Recall

• In studying demand, remember: Income, Price of other products (substitute/complement), Taste, Expected events, Number of consumers, and Bandwagon effect

• Normal vs. Inferior goods: how demand changes based on changes in income

• Substitutes vs. Complements: effect of one product's price on the demand for its related product