2.1.2
Note

Non-Price Determinants of Demand

2.1.2 Demand & supply

Idea

A change in a good’s own price moves quantity demanded along the demand curve; a change in any other factor shifts the whole curve. There are five such non-price determinants, remembered by the acronym P-TIDE: Price of related goods, Tastes and preferences, Income, Demographics, Expectations.

Mechanism

  • Price of related goods. Substitutes satisfy similar wants, so a rise in the price of one raises demand for the other (demand changes in the same direction as the related good’s price). Complements are consumed jointly, so a rise in the price of one lowers demand for the other (opposite direction). The extent of these cross-price effects is governed by cross elasticity of demand. This is distinct from derived demand, which links two goods in an input–output relationship (flour and bread), not two final goods.

  • Tastes and preferences. What consumers find desirable shifts demand: a good that is trending, effective advertising, or government policy (anti-smoking education cutting demand for cigarettes) all move the curve.

  • Income. As income rises, purchasing power rises and demand for normal goods increases, while demand for inferior goods falls as consumers switch up. The size of the response — necessity, luxury or inferior — is governed by income elasticity of demand.

  • Demographics. Population size sets the number of potential buyers; age composition (an ageing population raising demand for healthcare) and gender composition shift the pattern of demand.

  • Expectations. A consumer expecting higher future income, or expecting prices to rise, raises current demand; one expecting prices to fall postpones consumption and lowers current demand.

Considerations

When a determinant shifts demand, price is momentarily out of equilibrium and the price mechanism restores it at a new equilibrium. The direction and size of the resulting price and quantity changes — and the effect on total revenue — depend on the elasticities, as set out in shifts versus movements and applying PES.