determinants of demand

2.1 Demand – definition (syllabus code 2.1.1)

2.1.1 What is demand?

Demand is the relationship between the own price of a good or service (P) and the quantity that consumers are willing and able to purchase (Q_d), ceteris paribus (all other factors held constant).

The law of demand states that, other things being equal, a rise in the own price leads to a fall in the quantity demanded and vice‑versa. This inverse relationship is illustrated by a downward‑sloping demand curve.

2.1.2 Demand function (syllabus code 2.1.2)

In algebraic form the demand for a good can be written as:

$$Q_d = f(P,\;Y,\;P_r,\;T,\;E,\;N)$$

• Q_d – quantity demanded.
• P – own price of the good (the variable that moves us along the curve).
• Y – consumer income.
• P_r – prices of related goods (substitutes and complements).
• T – tastes and preferences.
• E – expectations about future price, income or shortage.
• N – number of buyers (population and demographics).

When any variable **other than P** changes, the whole demand curve shifts; a change in **P** causes a movement along the same curve.

2.1.3 Determinants of demand (syllabus code 2.1.3)

All variables in the demand function except the own price are called **non‑price determinants**. A change in any of them shifts the entire demand curve to the right (increase) or to the left (decrease). The own price, by contrast, produces a movement along the curve.

2.1.3.1 Price of related goods (syllabus code 2.1.3.1)

• Substitutes – an increase in the price of a substitute makes the original good relatively cheaper, shifting its demand curve right.
  Example: Rise in the price of coffee → demand for tea shifts right.
• Complements – an increase in the price of a complement makes the joint purchase more expensive, shifting demand left.
  Example: Rise in the price of printers → demand for ink cartridges shifts left.

2.1.3.2 Consumer income (syllabus code 2.1.4)

• Normal goods – demand rises when income rises (right‑shift) and falls when income falls.
  Example: Higher wages → more demand for restaurant meals.
• Inferior goods – demand falls when income rises (left‑shift) and rises when income falls.
  Example: Higher wages → less demand for instant noodles.

2.1.3.3 Tastes and preferences (syllabus code 2.1.5)

Changes in consumer tastes, driven by advertising, health information, fashion, cultural trends, etc., shift demand. A favourable change shifts the curve right; an unfavourable change shifts it left.

Example: A health campaign promoting apples → demand for apples shifts right.

2.1.3.4 Expectations (syllabus code 2.1.6)

• Expected future price increase → current demand rises (right‑shift).
• Expected future income increase → current demand rises.
• Expected future shortage (e.g., anticipated supply disruption) → current demand rises.

Example: Anticipation of a rise in house prices → more current house purchases.

2.1.3.5 Number of buyers – population and demographics (syllabus code 2.1.7)

• Growth in the number of consumers shifts demand right.
• Demographic changes (age, gender, cultural groups) can increase or decrease demand for particular goods.

Example: A growing youth population → higher demand for smartphones.

2.1.3.6 Developing‑country illustration (syllabus relevance)

In many developing economies, a rise in the world price of imported fertiliser raises production costs for staple crops. Farmers therefore increase demand for locally produced organic produce, which requires little or no chemical fertiliser. This is a right‑ward shift of the demand curve for organic vegetables.

2.1.4 Shift versus movement (syllabus code 2.1.8)

When any of the non‑price determinants (price of related goods, income, tastes, expectations, number of buyers) changes, the **whole demand curve shifts** either right (increase) or left (decrease). By contrast, a change in the **own price** of the good results in a **movement along** the same demand curve, illustrating the law of demand.

2.1.5 Related concept – price elasticity of demand (Topic 2.2, syllabus code 2.2)

2.1.6 Diagrammatic representation (syllabus code 2.1.9)

When a determinant causes a shift, the entire demand curve moves. The diagram below shows a right‑shift (increase) and a left‑shift (decrease). In exam answers you must label:

• Axes – Price (vertical) and Quantity (horizontal).
• Original curve – D₁.
• New curve – D₂ (right‑shift) or D₃ (left‑shift).
• The determinant that has changed (e.g., “increase in consumer income – normal good”).

2.1.7 Quick‑check questions (syllabus code 2.1.10)

1. Explain how a rise in the price of petrol would affect the demand for electric cars. Identify the determinant and the direction of the shift.
2. A good’s quantity demanded falls when consumer income rises. Classify the good and explain why.
3. Describe how expectations of a future price increase can cause a current increase in demand, even if the current price has not changed.
4. Explain why an increase in consumer income shifts the demand curve for restaurant meals to the right. (This question tests the ability to **explain** the mechanism – AO2.)

2.1.8 Key take‑aways (syllabus code 2.1.11)

• Own‑price changes → movement along the demand curve; all other determinants → shift of the whole curve.
• The six non‑price determinants are:
  1. Price of substitutes
  2. Price of complements
  3. Consumer income (normal vs. inferior)
  4. Tastes and preferences
  5. Expectations about future price, income or shortage
  6. Number of buyers (population & demographics)
• In exam answers always state:
  1. The determinant that has changed,
  2. The expected direction of the shift (right = increase, left = decrease),
  3. A labelled diagram illustrating the shift.

2.1.9 Summary table of determinants (aligned with syllabus)