determinants of demand
Demand and Supply Curves – Determinants of Demand
What is Demand?
Demand is the amount of a good or service that consumers are willing and able to buy at different prices. Think of a vending machine: the more you pay, the more snacks you can get, but at a higher price you might buy fewer snacks. 📉
Determinants of Demand
- Income (I) – When people have more money, they buy more. If your allowance increases, you might buy more video games.
- Tastes & Preferences (T) – Trends or new flavors can make a product suddenly popular. 🍦
- Prices of Related Goods (Prelated) –
- Substitutes: If the price of chocolate milk rises, you might buy chocolate milk instead.
- Complements: If the price of pizza drops, you might buy more pizza and also more soda.
- Expectations (E) – If you think the price will rise next month, you might buy now.
- Number of Buyers (N) – More people in the market means higher demand.
The relationship can be written as:
$Q_d = f(P, I, T, P_{related}, E, N)$
where $Q_d$ is the quantity demanded and $P$ is the price of the good itself.
Exam Tip 🚀
When answering “Explain how a change in X affects demand”, always:
- Identify the determinant (e.g., income).
- State the direction of the shift (right or left).
- Explain the economic reasoning behind the shift.
- Use a diagram if possible, labeling the new demand curve.
| Price ($) | Quantity Demanded (units) |
|---|---|
| 5 | 120 |
| 10 | 80 |
| 15 | 50 |
Analogy: The Ice Cream Shop
Imagine an ice‑cream shop that sells vanilla scoops. If the shop raises the price from $2 to $3, fewer students will buy a scoop because it costs more. If a new flavour, like chocolate, becomes popular (tastes change), the shop might see more customers overall. If the price of milkshakes (a complement) falls, more people might pair a scoop with a milkshake, increasing demand for ice cream. 📈
Revision
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