Economics is the social science that analyzes the production, distribution, and consumption of goods and services.

Tuesday, 3 January 2012

Determinants of Demand

Determinants of demand
Based on theories of ceteris paribus, economist make the research how determine the change in price and quantity demanded. So, we need to explain the factors influence demand either increase or decrease. The price is not only factor that determines how much of a goods will be buying. Demand is also affected by the following:

a.                  Price of related goods
The demand for a product is also affected by a change in the price of related goods. Related goods fall into two categories:

                                                  i.                  Substitute goods are goods or services that can be used in place another product or service. For example, communication services like Maxis and Celcom. 

For example, when the price of Maxis increase, the quantity demand for Maxis will fall (law of demand) and the people will look for another alternative. Thus, the demand for Celcom will increase (see Figure 2.3).

                                                  ii.                    Complementary goods are goods that are used in conjunction with another product. For example, petrol and car.

For example, when the price of car increases, the quantity demand for car will fall and demand for petrol will also decrease as both are used together (see Figure 2.4).

 b.                  Consumer’s Income
When the income increase, consumers’ demand for more goods and services will increase, ceteris paribus. Goods that increase in demand as income increase are normal goods. For examples are cars, shirts and books. Goods that decrease in demand as income increases are inferior goods such as used cars, salt-fish and low grade rice.
                        When the income increases, demand curve will shift to the right.

c.                  Taste and fashions

Taste and fashions of consumers change significantly. If a product becomes more fashionable, the demand for it will increase and if the same product becomes outdated, the demand for it will fall. As tastes and fashions change, demand will also change. For example, change in music, apparel or recreation.

d.                  Population

Demand depends on the size of the total population in the market. A large number of population will creates a greater demand for goods or services. For example, when the population in Bandar Penawar increases, demand for house, bus services and other goods or services will be increases.  Increasing population will shift the supply curve to the right.

e.                  Festive seasons and climatic condition

During festive seasons, different products will be in high demand. For example, during Chinese New Year, the demand for mandarin oranges will be greater and during the Hari Raya festivities, the demand for lemang will be increase. So, if it positive increase, the demand curve will shift to the right.

f.                    Price expected

If the people think that prices are going to rise in the future, they are likely to buy more now before the price does go up. For example, when the government plans to increase the price of sugar the following week, the demand for sugar will immediately increase because consumers want to store for future use because of expected higher price. So, if price expected increase, demand curve for today will shift to the right (increase).