Demand and supply
Factors influencing demand
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As people’s incomes rise, their demand for most goods will rise. Such goods are called normal goods. There are exceptions to this general rule, however. As people get richer, they spend less on inferior goods, such as supermarket ‘value’ ranges, and switch to better quality goods.
The number and price of substitute goods
Substitutes are alternative goods and can satisfy the same want or need.
The higher the price of substitute goods, the higher will be the demand for this good as people switch from the substitutes.
Example: Tea and coffee
If tea goes up in price, the demand for coffee will rise.
The number and price of complementary goods.
Complements are goods that tend to be bought and used together so that an increase in the demand for one is likely to cause an increase in the demand for the other.
Examples: cars and petrol, cricket bats and balls, and headphones and electronic devices for playing music.
Fashion, taste and attitudes:
A change in fashion or tastes will also alter the demand for a product. For example, if it becomes fashionable for middle-class households in the UK to wear jeans, expenditure on jeans will increase. And tastes can be affected by advertisers and suppliers trying to 'create' demand for their products.
Rules and regulations such as the imposition of taxes on tobacco and alcohol will affect the demand for certain products. Sales taxes cause prices to increase, thereby reducing the level of demand.