Factors That Determine The Demand For Goods

After you have worked through this section of the learning unit, you should be able to:

  • identify the factors that influence the demand for a good or service

Each of us is a consumer of goods and services. Each day, we require certain goods and services to stay alive and we consume goods and services to satisfy some of our needs and wants. The amount of any particular good that we plan to buy depends on many diverse factors.

Think of any product you use on a regular basis. From the following list choose three factors that you think are the most important in determining how much you use of it.

Most of these factors are significant except the supply or availability of it.

Watch the following video clip to see what others have to say about the demand of products:

While there are many factors that influence the demand for goods and services, economists have identified the following as the most important:

  • tastes and preferences (represented by the symbol T)
  • income (represented by the symbol Y)
  • the price of the product (represented by the symbol Px)
  • the number of potential buyers (represented by the symbol N)
  • the price of related goods (represented by the symbol Pg)
  • substitutes
  • compliments
  • other factors such as
    • the weather
    • expected prices

We will discuss each of the above in more detail.

You might have noticed that it does not include the supply or availability of the good or service.

Let’s say I have R25 and I decide to buy 5 pieces of chicken at R5 per piece. When I get to the shop, the price is R6 per piece.

Can I still buy 5 pieces for R25?

Has my intention changed?

I can no longer buy 5 pieces for R25, but that does not mean my intention has changed, I may still intend to buy 5 pieces of chicken at that price, and will have to keep looking in the market for a willing seller.

Let’s say I intend to buy 5 pieces of chicken at R5 per piece but when I get to the shop it is sold out and I am unable to buy any.

Once again, my intention has not changed. This is a crucial point. As stated earlier in the definition of demand, here we are dealing with the intention of buyers and not the actual outcome in the market. I intend buying a certain number of pieces of fried chicken based on my taste for it, its price and my income. The fact that when I arrived at the fried chicken outlet they were sold out, did not change my intentions. It did, however, change the outcome in that I was not able to buy it and satisfy my want for it.

Do the following activity to check your understanding of the factors that determine the demand for goods:

Which of the following is not a factor that determines the demand for ice cream?

Think again.

The price of a good or service has an important impact on the quantity demanded.

Think again.

As income of households changes they change their demand for goods and services.

This is the right choice.

When we deal with demand we assume that the good or service is available.  Remember that demand refers to the intention of buyers which is not dependent on the availability of the good or service

Think again.

As the taste and preferences of people change they change their demand for goods and services.

Think again.

An advertising campaign for a good and services might cause people to demand more of it.

Which of the following factors do you think would increase how much of good or service consumers demand?

All these factors will increase the quantity that consumers will demand.