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What are the determinants of demand?

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Quick Answer

The determinants of demand are the price of the good or service, income of the buyer, prices of related goods or services, tastes, preferences and future price expectations. The number of buyers may be considered another determinant relating to aggregate demand.

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Full Answer

The Law of Demand states that when price rises, the quantity demanded falls, and when price falls, demand rises. A strong response to changes in price is known as elastic demand, and a weak response is known as inelastic demand. When the income of the buyer increases, demand typically increases. For complementary goods or services, such as automobiles and gasoline, an increase in the price of one decreases the demand for the other. In 2008, when gas prices rose to 4 dollars per gallon, the demand for Hummers fell dramatically. A decrease in the price of a substitute product results in a lower demand.

The tastes and preferences of the consumer rise and fall, also causing the demand to rise and fall proportionately. If consumers expect a product to decrease in value in the future, demand decreases. Between 2007 and 2011, home values decreased by 30 percent, but demand did not increase proportionately because consumers expected values to continue to fall.

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