Price is not the only economic variable that affects demand. Demand is also affected by a number of other non-price factors, often called underlying determinants – these include.
The needs of the consumer
If a good or service is a necessity then, assuming the consumer has sufficient income, it is likely to be demanded irrespective of its price. The greater the need for a product, the greater the demand. For example, college students are more likely to need academic textbooks than retired people. Some needs, such as the need for food, are common while other needs are specific to the individual, such as the need for particular medicines.
Consumer income (Y)
When considering the impact of income on demand, economists differentiate normal and inferior goods. Generally, for normal goods, the higher the income of a consumer the greater the quantity demanded. [The symbol ‘Y’ is used for income.] However, with inferior goods, an increase in income will lead to a reduction in demand. For example, individuals on very low incomes are less likely to demand new motor cars, and more likely to take the bus. However, if they obtain higher income, demand for public transport may fall, while the demand for private transport is likely to rise. In this case, private transport is a normal good and public transport an inferior one.
Consumer tastes, preferences and fashions
Tastes can change over time, as can preferences and fashions, and demand can increase or decrease to reflect these changes. For example, cigarette smoking is much less fashionable than it used to be.
Some products, like alcohol, gambling, and cigarettes, are addictive. The stronger the addiction, the greater the demand. Addiction to a product may interfere with rational decision making as invividuals forgo their own self-interest.
Consumers may become loyal to particular brands, and this can have a significant influence on how consumers allocate their income. Brands give consumers confidence and take some of the risk out of purchasing.
The price of substitute products
Changes in the price of substitutes can greatly affect demand. An increase in the price of a close substitute will result in an increase in the demand for a product, as consumers switch from the substitute. For example, an increase in the price of one brand of petrol is likely to result in an increase in demand for a substitute brand.
The price of complementary products
Many products have complements, which are either bought at the same time as the product, or are needed to make the product work. For example, batteries are a complement to many portable electronic products. As the price of complements rise, the demand for a product is likely to fall. A situation where complementary products are bought at the same time it is referred to as joint demand.
The impact of good or bad weather and other natural factors can have a considerable impact on demand. Certain products are highly dependent on weather or natural conditions, such as the demand for ice cream, raincoats, and holidays.
Consumer expectations can influence the demand for many items. This is especially true with expensive and luxury items, including the demand for housing, for motor cars and expensive consumer electronics products.
Knowledge, or ignorance, can affect the pattern of consumer demand. If a rational consumer knows that a product is harmful or beneficial to them they may reduce or increase their demand accordingly. Knowing that information and ignorance affect consumer demand, producers may attempt to encourage consumption through positive and persuasive advertising.
Individual psychology and behavioural economics
The work of modern economists, including behavioural economists, increasingly suggest that demand for goods and services can be influenced by individual psychology and, furthermore, individual decisions can be manipulated by other individuals.
Behavioural economics attempts to understand the effect of individual psychological processes, including emotions, norms, and habits on individual decision-making in a variety of economic contexts. Research by behavioural psychologists suggests that several biases are at work which shape individual consumer behaviour.
Behavioural economists suggest that decisions are not taken independently of the context in which the options are presented. How a particular choice is presented – the choice architecture – can have a significant effect on the choice made. A decision can also be influenced by the ‘choice architect’. A choice architect is an individual or organisation that is responsible for organising the context in which people make decisions. A choice architect may be a parent, teacher, advertiser, peer, employer, the media, or a politician. Choices are rarely neutral and commonly mediated in some way. For example, where a good is placed on a shelf can affect the likelihood that it will be chosen.
The impact of advertising
Successful advertising can have a considerable influence on consumer demand. Advertising can increase consumer awareness of a product and encourage consumption.
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