Factors Influencing the Demand Curve

 

            Apart from its own place, there are other several factors that determine the nature of the demand curve for a good. We briefly discuss those.

1)   Price of close substitutes and complements:

Given other things, if the price of a substitute falls, then the consumer will shift his preference in favor of the substitute, thereby, creating a fall in the demand for the concerned good. Tea and coffee are close substitute. If the price of coffee suddenly falls, price of tea remaining the same, the level of consumption of tea may show a fall. This is because; consumer who could not afford coffee previously may now shift to it, thereby decreasing their consumption of tea.

Again, for some people it is seen that due to a price rise in butter, their consumption of butter not only declines, but also a sharp reduction in the quantity demanded also takes place in the case of bread. This is because bread and butter are complimentary item to some people and they cannot take one without the other.

2)   The income of the consumer:

As the income of the consumer rises, his buying potential tends to rise. So with a similar price structure, the consumer is now in a position to buy more of the same good. This results in an upward shift of the demand curve. Discussion about movement along a demand curve and shift of a demand curve is dealt later.

3)   Existing wealth of the consumer:

Income is not the only decisive factor for a shift in the demand curve. If the existing wealth of the consumer, e.g., holding of stocks, bonds, real estate, business property, etc. permits him to make a purchase, the demand curve may shift rightward.

4)   Change in taste and preference of the consumer:

If the taste and preferences of the consumer no more permits him to continue with the same good, given other things, the consumer may switch over to some other good. This may cause the demand curve to the shift leftward.

5)   Expectation regarding future price changes:

If the consumer expects a price fall in the near future he may curtail his present purchase to purchase in the future. This depends much on the nature of the good. If the good is an essential one or is of a perishable nature, predictions regarding future price changes may not be of any use to the consumer.

6)   Special influences:

Sometimes there exist factors, which are applicable only to a particular good in question. For example, demand of woolen garments rise in the winter season; if the traffic rules are made more strict, you will find the sale of helmets rising, etc.

7)   Population:

At a given price, how much of a good will be purchased depends much on the size of the market. For a large market, the level of purchase of a good or a service will be more and vice versa. For example, if the population of a city increases its demands for housing will also increase.

Factors Affecting the

Demand Curve

Examples
Average Income When average income increases, demand increases
Population Increase in the population increases the market size and hence demand
Price of Related

Goods

Substitutes: When relative price of potassium fertilizers increases, demand for Nitrogenous fertilizers increases

Complements: When the price of petrol increases, demand for Light Commercial vehicles decreases.

Tastes & Preferences Demand of Stylized motor cycles and scooters
Future

Expectations

Buy stocks when you expect the market to move up
Information Mad-cow disease in Europe decreased the demand for beef.

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