The 3 Price Determinants of Quantity Demand #1 The Income Effect: indicates that a lower price increases the “purchasing power” of a buyer’s money income (also known as real income.) If income stays the same and the price level (CPI) increases, then real income or purchasing power goes down, causing a decrease in the quantity demanded (inflation). If income stays the same and the price level (PL) decreases, then real income or purchasing power goes up, causing an increase in the quantity demanded (deflation or disinflation.)

The 3 Price Determinants of Quantity Demanded #2 The Law of Diminishing Marginal Utilities: Every time an individual purchases a unit of a good or service they begin to move towards 100% total satisfaction. Each additional (marginal) unit purchased moves them closer to total satisfaction, but brings less satisfaction than the previously purchased unit. Eventually, the market will get to a place where it stops purchasing additional units (greater satisfaction from saving their income than spending it.) If the market price goes down the market will get to that place where they stop buying additional units later (QD up.) If, the market price goes up, the market will get to that point sooner (QD down.)

The 3 Price Determinants of Quantity Demanded (QD) #3 The Substitution Effect: suggests that at a lower price, buyers have the incentive to substitute what is now a less expensive product for similar products that are now relatively more expensive. The product whose price has fallen is now “a better deal” relative to the other products. For example, a decline in the price of chicken will increase the QD of chicken, but decrease the “demand” for pork, lamb, beef, fish (substitutes.)

5 Non Price Determinants of Demand (Shifters) #1 Consumers Tastes: A favorable change in consumer tastes or preferences for a product will increase demand at all prices (The Apple IPHONE) and cause the demand curve to shift to the right. An unfavorable change in consumer preferences will decrease demand at all prices(HP no longer making PCs), shifting demand curve to the left. New products may have a large impact on consumer taste. The introduction of digital cameras greatly decreased the demand for film cameras.

5 Non Price Determinants of Demand (Shifters) #2 Number of Buyers: An increase in the number of buyers in the market is likely to increase product demand and vice versa. Population growth or decline of various geographic regions (urban flee) directly impacts the demand for products at all prices. An increase in buyers at all prices will shift the demand curve to the right and a decrease in buyers at all prices, shift the demand curve to the left.

5 Non Price Determinants of Demand (Shifters) #3 Income: How income affects demand varies depending on the good or service. Consumers typically buy more products when their income increases - direct relationship. (But there are exceptions). Products whose demand varies directly with money income are called normal or superior goods (i.e. name brands). Products whose demand varies inversely with money income are called inferior goods ( i.e. generic brands).

5 Non Price Determinants of Demand (Shifters) #4 Prices of Related Goods: A change in the price of a related good may either increase or decrease the demand for a product. A substitute good is one that can be used “in place of” another good. When two products are substitutes, an increase in the price of one will increase the demand for the other. Conversely, a decrease in the price of one will decrease the demand for the other. Complementary goods are “used together,” they are typically demanded jointly. If the price of a complement goes up, the demand for the related good will decline. Conversely, if the price of a complement falls, the demand for a related good will increase. The vast majority of goods are unrelated or independent.

5 Non Price Determinants of Demand (Shifters) #5 Consumer Future Expectations: A newly formed expectation of higher future prices may cause consumers to buy now in order to “beat” the anticipated price rises, thus increasing current demand. Similarly, a change in expectations concerning future income may prompt consumers to change their current spending. Which may either increase or decrease current demand.

Changes in Demand & Quantity Demanded A change in demand must not be confused with a change in quantity demanded. A change in demand is a shift of the demand curve to the right (increase) or to the left (decrease.) It occurs, because the consumer’s state of mind about purchasing the product has been altered in response to a change in one or more of the determinants of demand. In contrast, a change in quantity demanded is a movement from one point to another point. The cause of such a change is an increase or decrease in the price of the product under consideration.