Forces behind the Demand Curve

What determines the market demand curve for cornflakes or gasoline or computers? A whole array of factors influences how much will be demanded at a given price: average levels of income, the size of the population, the prices and availability of related goods, individual and social tastes, and special influences.

• The average income of consumers is a key determinant of demand. As people's incomes rise, indi viduals tend to buy more of almost everything, even if prices don't change. Automobile purchases tend to rise sharply with higher levels of income.

• The size of the market—measured, say, by the population—clearly affects the market demand curve. California's 32 million people tend to buy 32 times more apples and cars than do Rhode Island's 1 million people.

• The prices and availability of related goods influence the demand for a commodity. A particularly important connection exists among substitute goods—ones that tend to perform the same function, such as cornflakes and oatmeal, pens and pencils, small cars and large cars, or oil and natural gas. Demand for good A tends to be low if the price of substitute product B is low. (For example, if the price of computers falls, will that increase or decrease the demand for typewriters?)

• In addition to these objective elements, there is a set of subjective elements called tastes or preferences. Tastes represent a variety of cultural and historical influences. They may reflect genuine psychological or physiological needs (for liquids, love, or excitement). And they may include artificially contrived cravings (for cigarettes, drugs, or fancy sports cars). They may also contain a large element of tradition or religion (eating beef is popular in America but taboo in India, while curried jellyfish is a delicacy in Japan but would make many Americans gag).

• Finally, special influences will affect the demand for particular goods. The demand for umbrellas is high in rainy Seattle but low in sunny Phoenix; the demand for air conditioners will rise in hot weather; the demand for automobiles will be low in New York, where public transportation is plentiful and parking is a nightmare. In addition, expectations about future economic conditions, particularly prices, may have an important impact on demand.

The determinants of demand are summarized in Table 3-2, which uses automobiles as an example.

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