Factors Affecting Demand

Hi!

As many of you have requested for the notes on NON-PRICE FACTORS affecting demand, I have decided to put up this entry. (NB:non-price factors result in a shift of the demand curve graphically). I have tried to cut down on the words but tried to retain the essence of the explanation as much as possible. Hope you guys find it useful!

(a) Prices and demand of related products
i. Substitute(s)
A substitute product is an alternative product that can replace another because it satisfies the same want. Examples of substitutes include coffee & tea and public buses & the MRT. If the price of tea changes, demand for coffee will change in the same direction eg a rise in tea prices causes a fall in the quantity demanded for tea and a rise in demand for coffee, even though the price of coffee itself has not changed.

ii. Complement(s)
A complementary product is one which must be used at the same time with another to satisfy the same human wants eg coffee and milk and petrol & cars. If petrol prices rise, demand for cars will change in the opposite direction (though the prices of cars have not risen, people find it more expensive to own cars, resulting in a fall in its demand). Complements are said to be goods that are jointly demanded.

(a) Consumers’ money income
i. Normal goods
These are goods whose demand rise with a rise in money income of consumers and vice versa. ie we buy more electronic gadgets, clothes and travel more when our incomes rise.

ii. Inferior goods
These are goods whose demand vary inversely with consumers’ money income. For instance Pentium 1 computers and fans. Consumers prefer less of such goods when their incomes grow.

(b) Consumers’ tastes and preferences
Consumers' tastes and preferences are influenced by their income, peers, advertisements, pop-star appeal, age, sex, culture etc. Changes in consumers’ tastes in favour of (or against) a good/service will raise (or reduce) its demand.

(c) Expectations of future price changes
The fear or expectation of a future price rise will induce people to buy more now thus raising demand for the good (consumer durables) concerned. If they expect the price to fall in future, they will postpone their purchases now thus reducing demand for the good concerned.

(d) Availability of credit facilities and hire purchases
Easy credit facilities eg. availability of low interest loans and favourable terms offered by banks makes the cost of borrowing funds or spending on credit more attractive. This would raise the demand for loans to encourage consumption of, and demand for, goods and services.
Less stringent hire purchase terms eg. longer repayment periods and smaller downpayment sum will allow more consumers the ability to buy the products now and encourage more purchases and thereby raising demand for goods such as cars, household appliances etc.

(e) Size and composition of population
A fast-growing population will demand more of most goods and services, other things held constant. Increased proportion of teenagers will raise demand for commodities that appeal to this age group eg. sports gear, fashion wear etc.
Increased birth rates will result in higher demand for baby-related goods while a rapidly greying population will mean higher demand for medical services, dentures, walking sticks etc.

(f) Seasonal factors
The demand for many goods and services such as clothing, food, water, healthcare and travel is influenced by seasonal climatic conditions.

“In the month of January, around the island of Singapore, heavy downpours have boosted businesses for some and caused havoc for others.” ST 15/1/06.
What were some of these affected businesses?
Did the changes represent a movement along, or shift of, the demand curves of these goods services?


(g) Government distribution of income
A reduction in personal income tax rates will result in greater disposable income and encourage the consumption of goods and services. On the other hand, an increase in GST tends to reduce the consumption of goods and services.
A progressive tax system (by taxing the rich more heavily) and giving subsidies to the poor will redistribute income in favour of the lower income group, thus their demand for other goods besides basic necessities may rise eg better food and housing.

(h) Other government economic policies
Anti-smoking campaigns, car ownership schemes eg. Certificates of Entitlement (COE) and Electronic Road Pricing (ERP), housing grants and the Economic Restructuring Shares are further examples of government policies that affect demand for related goods and services.