Determining Factors of the demand

Administración y dirección de empresas # Rent. Taste of the consumer. Demand. Price Elasticity. Importance of the good depending the cost

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Introduction

We can define the demand like the capacity and desire to buy certain amounts of a good at different levels from price in a specific period of time, being constant the rest of the other factors.

The demanded amount of a good is the amount that the consumers want and can buy. Through the demand we can examine the conduct of the buyers, and the relation with the salesmen on the market. On the market we can interchange a product with a determined price by the interaction of the supply and the demand.

Determining Factors of the demand

In addition to the price of a good, the demanded amount depends on other factors like the following ones:

The rent: a reduction of the rent means that we would have less to spend, reason why it would be necessary to diminish the demand of some goods. For most of the goods, the rent diminishes the demanded amount of the good diminishes as well. These goods are denominated normal goods.

But not all the goods are normal. If the demand of a good increases when the rent diminishes it will denominate inferior goods.

The prices of other goods: When the reduction of the price of a good reduces the demand of another one, both are denominated substitutes goods (jerseys and sweater shirts)

When the reduction of the price of a good elevates the demand of another one, they are denominated complementary goods (gasoline and automobiles, computers and software)

Taste of the consumer: The most evidential determination of our demand is taste or preferences. The economists normally do not try to explain the consumers taste because they are based on historical and psychological issues that are outside the field of economy. Nevertheless, they examine what happens when pleasures change.

The expectations: Our expectations of the future can influence our present demand of a service. For example, if we expect to gain higher rent the next month, it is possible we will spend more in the present.

The Market of compact disc of music

Last year, hundreds of million of virgin CDs were sold to be recorded. One part went to enrich the private business, but the most important one to be mentioned consumers. Formerly, the vinyl disc was "the original one", and although it was possible to be copied to cassette, was not preemtive. With compact discs, the situation is completely different: the computerized masterizaciones and the engravers of CDs guarantee identical copies to the original one.

The original disc and the copy have a single substantial difference: the price

In order to study the behavior of the consumers I will use an example, namely the market of compact disc of music. How do consumers decide how many CDs are they going to buy in a month and what factors influence their decision?

The rent: What would happen with the demand of CDs if someone has a summer job only, it is most probable it is that the demand of CDs diminishes the rest of the year.

The prices of other goods: Let us assume a low the price of mini disc. The law of demand affirms that if the price of mini disc is low we will buy more mini disc. Compact disc and mini disc reproduces music, so that demand of CDs will decrease. Now, if the price of the reproducers of CDs low, we will buy more reproducers according to the law of demand. Nevertheless, in this case we will buy more CDs because these two goods are used together.

The tastes of the consumer: If we like all type of music, we will buy more CDs as if we like of only one group or one singer.

The expectations: If we hoped to find a job or to earn more in our present job it is possible that we use more of our money to buy CDs at the present time.

The price:

In this table demand represents the monthly amounts of CDs bought per consumer in relation with the price of one CD.

Price of a CD (in Pounds)

Demanded amount of CDs (monthly)

6

10

8

9

10

8

12

7

15

6

17

5

19

4

21

3

In the table it is possible to be observed that if the price rises, the consumer will buy an inferior amount of it.

We can represent the numbers of the table with a graphic. The black line relates the price and the demanded amount and it is called demand curve.

The curve of demand has the following form:

Price

of CDs

A

£ 15,00

D

0

6

Quantity of CDs

The graph shows that if we increase the price demanded, the amount diminishes. The previous table is about an individual consumer demand, but on the market there are many consumers, which is the reason for the necessity to do the curve of the demand of the market. That is obtained as adding the individual demands of all the consumers who belong to the market.

The table of the demand of the market would be the following:

Price of a CD (in Pounds)

Demanded amount of CDs (monthly)

C-1

Demanded amount of CDs (monthly

C-2

Demanded amount of CDs (monthly

C-3

Demanded amount of CDs (monthly)

MARKET

6

10

8

12

32

8

9

7

11

27

10

8

6

10

24

12

7

5

9

21

15

6

4

8

18

17

5

3

7

15

19

4

2

6

12

21

3

1

5

9

Therefore, the demanded amount is related negatively to the price of the good. This relation is certain for most of the goods of the economy and the economists call it “law of the demand”: keeping all the other factors constant, when the price of good raises, the demanded amount diminishes.

Reasons of this are:

  • The first effect is denominated by substitution, and means that whenever the price of a good raises (e.g. compact disc) the consumer can buy another one cheaper to replace the other one and it can cover the same necessity; tapes of cassette, for example.

  • The second reason is effect rents. If the price of the CDs rises, but not my rent, my spending power and my demand of that good is low.

Determinants of the demand

Variables that affect the demanded amount

A variation of this variable produces:

Price

Movement throughout the demand curve

Rent

Moves the demand curve

Prices of other goods

Moves the demand curve

Tastes of the consumer

Moves the demand curve

Expectations

Moves the demand curve

Number of buyers

Moves the demand curve

Movements throughout the demand curve:

The demand curve represents what happens with the demanded amount of CDs when only the price changes: the rent, the taste and expectations of the consumer and the prices of products related to the CDs do not change. It is important to remember what is fixed and what does not.

Graphically, when the price of a good changes we move from a point to another one throughout the demand curve, because the demanded amount changes.

In the following graph we can observe what happens when the price of a good decreases or increases.

Price

of CDs

A PRICE DECREASE

£ 15,00

£ 10,08 B

D

0 6 8

Quantity

of CDs

Price

of CDs

£19,32 A

B PRICE INCREASE

£ 15,00

D

0 4 6

Quantity

of CDs

Shift of the demand curve

Whenever any factor of demand, not the price, varies, the demand curve moves. Any change that elevates the amount demanded, independent from the prices, moves the demand curve to the right. Also, any change that reduces the demanded amount, independent from the prices, moves the demand curve towards the left.

Price

of CDs

A PRICE DECREASE

£ 15,00

B

D2 D1

0 4 6

Quantity

of CDs

Price

of CDs

PRICE INCREASE

£ 15,00 B

A

D2

D1

0

6 8 Quantity

of CDs

The demand curve moves of D1 to D2, with which the demanded amount increases or diminishes such to prices. The displacement of the curve is parallel as much towards the right as towards the left.

The elasticity of the demand

The elasticity of the demand is moderate calculating the percentage in which it varies the demanded amount of a good when its price varies in one percent. If the result of the operation is greater than one, the demand of that good is elastic; if the result is between zero and one, its demand is inelastic.

The factors that influence in which the demand of a good is more or less elastic are:

Type of necessities that the good satisfies. If the good is of first necessity the demand is non-variable, it is acquired to what price is like. However if it is a luxury good the demand will be variable because if the price increases slightly many consumers will be able to do without it.

Substitute goods. If good substitutes exist the demand of the good will be very variable.

Importance of the good depending the cost. If the cost of the good means a very small percentage of the salary of the individuals, its demand will be inelastic. The variations in its price influences very little in the decisions of the consumers who wish to acquire them.

The passage of time. For almost all the goods, the greater it is the period of considered time the greater will be the variability of the demand. If the price of the gasoline increased, its consumption does not vary much, but after some time it could be replaced in some of its uses by coal, in other uses by alcohol, so that the diminution in the demand only notes when time passes by.

The price. Finally it is necessary to consider that the elasticity of the demand is not the same one throughout the whole curve. It is possible that for high prices the demand is less elastic than when the prices are lower or the other way around, depending on the enquired product.

Elasticity

Demand is Price
Elastic: |ðp| > 1.0

Demand is Price
Inelastic: |ðp| < 1.0

Price Reduction

Expenditure
increases

Expenditure
decreases

Price Increase

Expenditure
decreases

Expenditure
increases

Price Elasticity of Demand

An important characteristic of demand is the relationship among market price, quantity demand and consumer expenditure. The nature of demand is such that a reduction in market price will usually lead to an increase in quantity demanded.

Given that consumer expenditure is the product of these two variables, the effect of a price reduction will have an uncertain impact on this expenditure. In some cases a reduction in price will be more than offset by a large increase in quantity demanded -- a situation where demand is price sensitive or price elastic.

Price

The Elastic Demand

0 Quantity

(PriceDetermining Factors of the demand
) (QdemandedDetermining Factors of the demand
) = ExpenditureDetermining Factors of the demand

In other cases, the reduction in price is proportionally smaller than the change in quantity -- a situation where demand is price insensitive or price inelastic.

Price

The Inelastic Demand

0 Quantity

(PmktDetermining Factors of the demand
) (QdemandedDetermining Factors of the demand
) = ExpenditureDetermining Factors of the demand

Bibliography:

Business Basics (1997), Economics (2nd ed), BPP Publishing

Nellis, J D Parker (1996), The Essence of The Economics (2nd ed)

Pulido San Roman,Antonio: Guidebook to understand the Economics

-Internet:

Web Ec - www.resourcesineconomics

www.digitaleconomist.com

Economics Interactive tutorial Supply and Demand

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