The Law of Demand states that the quantity of a good demanded will fall as its price rises and will rise as the price falls – all things being equal. Quantity demanded of a good is therefore inversely related to price. The determinants of Demand are:
• Price of the good itself.
• Price of other goods/products, substitutes or compliments.
• A substitute is a good that exactly replaces a good. Increase the price of a substitute good and the demand for our good increases, and vice versa. A complement is a good that is consumed in conjunction with our good. Increase the price of a complement and you decrease the demand for our good, and vice versa.
• Income available. When income increases consumers buy more of most goods and vice versa. But, this does not happen for all goods. Goods that do increase in demand as income increases are known as normal goods (e.g. bread & milk). Goods that decrease in demand as income increases are known as inferior goods (black and white TVs).
• Price and availability of money and credit: If the cost of credit rises, the demand for a good will fall, and vice versa.
• Market size/Population: Any increases in population will cause demand to increase, this can be clearly shown in segmented markets e.g. the increased demand as a result of a baby boom, and vice versa.
• Tastes and Preferences: If tastes and preferences change, i.e. the desire to buy a particular fashion, demand will either increase for that coming into fashion and decrease for that going out of fashion.
• Expectations: Expectations of changes in any of the above will cause demand to change.
• Other influences (weather, temperature, reputation etc.).
Movement along a demand curve occurs when the price of the good itself changes.
[Diagram correctly labelled demonstrating a movement along a demand curve. Diagram explained.]
Shifts in a demand curve occur when any of the other factors change i.e. price of other goods, income, tastes/preferences and population.