3.3 Other Determinants of Demand
Learning Objectives
By the end of this section, you will be able to:
- Understand the difference between demand and quantity demanded
- Know the four main determinants of demand
- Explain demand shifts from both horizontal and vertical perspectives
- Create an aggregate demand curve given individual curves
A Better Bus System
In section 3.2, we explored how the price of gasoline affected quantity demanded, but what about other factors that affect our choices? In May 2016, New York’s Metropolitan Transit Authority introduced high-tech buses equipped with Wi-Fi and USB ports to charge phones and other devices. These improvements encourage people to substitute away from cars, decreasing the demand for gasoline regardless of price. As we will see in this section, there are many determinants of demand. The four we will explore in detail are:
- Income
- Prices of Related Goods
- Tastes and Preferences
- Expectations
As you will see, changes in these factors affect the interaction of price and quantity on every point of our demand curve, resulting in a shift of the entire curve. First, let’s clear up some terminology.
Is demand the same as quantity demanded?
In economic terminology, demand is not the same as quantity demanded. When economists talk about demand, they mean the relationship between a range of prices and the quantities demanded at those prices, as illustrated by a demand curve or demand schedule. When economists talk about quantity demanded, they mean only a certain point on the demand curve, or one quantity on the demand schedule. In other words, a change in quantity demanded is very different than a change in demand.
A change in demand refers to a shift in the demand curve that affects the whole diagram and the interactions between price and quantity.
A change in quantity demanded refers to a movement along the demand curve, exploring different points along the same curve.
We examined changes in quantity demanded in Topic 3.2. In this section, we discuss changes in demand.
1. Income
The first determinant of demand we will explore is income. If you were to land a job with a top salary tomorrow, how would that affect your demand for different items? Perhaps you would exchange your old Honda Accord for a Porsche, or go on a shopping spree at a high-end clothing store. Though having more money means you can buy more goods, there are some goods that you may actually buy less of. In introductory microeconomics, we classify goods into two types: inferior goods and normal goods. For inferior goods, as your income rises your demand falls. For normal goods, as income rises your demand rises
Consider Kraft Dinner and steak. On a student budget, Kraft Dinner or similar low-cost items can be a dietary necessity, but as your income increases, you will likely eat less of these low-quality foods. This makes Kraft Dinner an inferior good. On the other hand, as your income increases, you will likely consume more steak and o