The determinants of demand

It is fairly obvious so far that the price of a good is a pretty strong determinant of its demand, but there are many other things that will affect demand too.

Real income. If one's real income rose (real means 'allowing for inflation'), one should be able to afford more CDs.
The price of other goods. If the price of CD players rose then one would expect demand for CD players to fall, and so would the demand for CDs. These goods are complements. If the prices of rock concerts rose then one would expect the demand for these concerts to fall. Perhaps those who decided against the concert might buy a CD instead. These goods are substitutes.
Tastes and preferences. A slightly obscure but very important determinant. As you get older, you may lose interest in the repetitive music currently in the charts and try some original sounds from the 60s, 70s or 80s. Changing preferences will affect your demand for a product regardless of its price.
Expectations of future prices. If you think that the price for CDs is likely to fall in the near future, perhaps because of reduced production costs or competition from the US, you may delay some purchases which will reduce demand in the current time period. Alternatively, you may feel that CD prices are likely to rise in the near future, perhaps due to the lack of competition in the retail market, so you may increase your demand in the current time period.
Advertising. Although many of you probably doubt the effectiveness of some of the appalling adverts on the TV, one assumes that these companies would not spend fortunes on these adverts if they did not expect to see a significant rise in demand for the product in question (Virgin and Our Price are always trying to sell you CDs via the TV.)
Population. Quite obviously, a significant rise in the number of people in a given area or country will affect the demand for a whole host of goods and services. Note that a change in the structure of the population (we have an ageing population) will increase the demand for some goods but reduce the demand for others.
Interest rates and credit conditions. If interest rates are relatively low then it is cheaper to borrow money that can then be spent. This is not so applicable to CDs, but will certainly affect the demand for 'big ticket' items such as cars and major electrical goods. In boom time (like the late 80s) it is often easier to obtain credit regardless of the rate of interest.

Now that you understand that there are many things that affect the demand for a good other than its price, I hope you can see the importance of the ceteris paribus assumption. The normal downward-sloping demand curve shows the relationship between the price of the good and its demand, all other things being equal. Those 'all other things' are the list above: incomes, prices of other goods, etc. If you do not make this assumption, then you could have a situation when the price of CDs falls, but at the same time one's income falls by such a large amount that one actually demands fewer CDs. In other words, one does not want to confuse shifts in the demand curve and movements along a demand curve.

	Created by cian.buckley+1 over 10 years ago

A note going into detail about Supply and Demand covered in the A-Level Economics course. Credit to: www.s-cool.co.uk/