Seven determinants affect the demand for goods and services. Business managers have to consider the effects of these determinants on the demand for their products in order to run their companies efficiently and make a profit.
Economists have identified seven determinants that influence the demand for products and services. Manufacturers and providers study these determinants to analyze their effects on the demand for their goods.
When a consumer's income increases, he buys more of a product because he has more money to spend. This drives the demand for products which increase accordingly. If income decreases, demand decreases for normal products such as clothing, food, vacations, cars and household appliances.
However, demand for certain products does not always increase with a rise in income. Consider a consumer who has a low income and always purchased low-fat ground beef because it's cheaper. If his income increases, he might begin to buy a more expensive ground tenderloin beef. In this case, the demand for low-fat ground beef will decline with an increase in income. Products that have reduced demand with increasing incomes are known as "inferior goods." Inferior, in this case, does not equate with lower quality. It means that the demand curve is negative with a rise in income.
A rise in income also increases the demand for luxury goods. Examples of luxury items are sports cars, gym memberships, fine dining and expensive vacations.
The law of supply and demand states that as the price for a particular commodity goes up, demand will decline. Consumers will usually react to an increase in prices by purchasing fewer products.
For example, if prices for oil rise, it leads to an increase in the price of gasoline at retail. Consumers adjust their driving habits to reduce their consumption of gasoline. This effect is seen during long-weekends when people drive shorter distances to visit relatives or take vacations.
3. Prices of Related Goods
Changes in the price of some products can affect the demand for related products. An example is a substitution of one product for another, or when a group of products is complementary to each other and used together.
Coke and Pepsi are examples of substitute products. A rise in the price of Coke will increase the demand for Pepsi as consumers switch to the lower-priced product. On the other hand, if Coke cuts its price, people will start buying more Coke, reducing the demand for Pepsi.
Changes in the prices of related goods affect the demand for complementary products. For example, a decrease in the price of video games increases the demand for video game consoles. Consider what happens if the price of hot dogs increases. Consumers will buy fewer hot dogs and the demand for buns declines.
4. Expectations of Future Prices
When consumers think that product prices will increase in future, they demand more of the product in the present. For instance, when drivers expect gasoline prices to rise next week, they rush out to fill their tanks today.
Another example is consumers' expectations about computer prices. If a consumer wants to replace her old computer but expects rapid changes in technology and computer prices to drop, she will delay the purchase to see what happens in the future.
5. Tastes and Preferences
Consumers' tastes and preferences are constantly changing. An aggressive celebrity-fueled advertising campaign may increase the demand for products. A new scientific health study may conclude that a product is bad for your health, resulting in a decline in demand.
6. Number of Consumers
An increase in consumers who want to purchase a product will increase the demand for that product. A rise in population will increase the demand for products, but other influences increase the number of potential buyers. For instance, a manufacturer may conduct an effective advertising campaign that expands the market for his products to new groups of consumers.
7. Propensity to Consume
The perceptions of consumers affect their desire to purchase products. For example, if economic conditions are good and consumers expect to keep their jobs and get consistent wage increases, they are more inclined to spend and demand more products. When consumer confidence is high, people feel more comfortable buying because they have a reasonable expectation that their income will continue into the future.
On the other hand, if economic conditions are uncertain and interest rates are high, consumers are more likely to put their money into savings accounts instead of purchasing goods.
Manufacturing and selling goods and services is a complex process. Each of these seven determinants is analyzed by producers to conduct effective marketing and advertising campaigns. Manufacturers make decisions about which products to produce and in what quantities. Managers consider these various determinants in their decision-making processes.