A good's relative price is joined by six other broad determinants of the amounts consumers purchase: (a) tastes and preferences; (b) income and its distribution; (c) prices of related goods; (d) numbers and ages of buyers; (e) expectations about future prices, incomes, and availability; and (f) government taxes, subsidies, and regulations.
Tastes and Preferences
Our preferences mirror perceptions of how desirable goods are (e.g., quality, types and styles), as shaped by our personal idiosyncrasies (experiential, biological, or neural differences, reactions to peer pressure or government regulations, etc.). Most advertising is aimed at altering preferences among goods subject to people's whims, including cars, clothes, and music. Male colognes are depicted as musky and macho, even though their female equivalents are often derived from the same base scents. New models of mini-vans and trucks are shown as being lower to the ground to appeal to women who, in ads, easily clamber aboard even when wearing high heels and short, tight dresses. And sales of mini-vans and male colognes to the targeted audiences soared.
Tastes and preferences cannot be measured precisely, but you should be able to evaluate how certain trends affect specific demands. For example, how have "animal-rights" campaigns affected demands for fur coats? And what would happen to the total demand for nose rings if they became signals of status because corporate executives began wearing them?
Income and Its Distribution
Demands for higher-quality goods tend to rise if income grows. Goods for which demand is positively related to income are normal goods. Most products and services are normal goods, which include luxuries that are especially responsive to changes in income—examples include resort vacations, jewelry, yachts, and live entertainment. On the other hand, when a poor family's income rises, its demands fall for such inferior goods as lye soap and pinto beans. When students graduate and get "real" jobs, their higher incomes typically cause them to buy fewer inferior goods, such as used tires, macaroni and cheese, or instant noodle soup.
With all else equal, it follows that income redistribution alters the structure of demands: Transferring income from the rich to the poor causes declines in demands for both inferior goods and luxuries, while rising inequality stimulates demands for both. Be aware, however, that one family's inferior good can be another's luxury good. For example, consider a middle-class family trading in a beat-up old car they view as an inferior heap. A poor family that scrimped to save a down-payment might view that same car as an incredible luxury.
Prices of Related Goods
A good's own price is important, but prices of related products also influence demand. Most goods are at least weak substitutes for one another.
Substitutes are the goods increasingly purchased in place of the item in question when its price rises, or vice versa.
For example, if premium cable channels dropped to $5 a month you might visit the theater less often – and you might also rent fewer videos. When coffee prices soar, sales of tea bags climb. Like movie tickets and TV, coffee and tea are close substitutes. Other examples include pretzels and potato chips, or phone calls, faxes, and e-mail; or hot tubs, Jacuzzis, and saunas.
Gasoline, cars, and tires are examples of goods typically consumed together.
Complementary goods are sets of goods that generate more satisfaction if consumed together.
Price increases for a good tend to reduce demands for its complements, and vice versa. If the price of gas rose significantly, people would probably but fewer new cars (especially gas hogs), and they would drive less, so they would demand fewer tires. Other sets of complements are bacon and eggs, videotapes and VCRs; gas, tires, and cars, or microwaves and TV dinners.
Numbers and Ages of Buyers
Population growth or the opening of foreign markets expands the numbers of potential buyers and, therefore, the market demands for most goods. The public's age structure is also a factor. Demands for baby products slumped when U.S. birth rates fell in the 1960s, but incomes for producers of diapers and formula—and then orthodontists—recovered somewhat when "baby boomers" began their families. Lengthened average life spans have swollen demands for golf courses, Ben-Gay, retirement communities, and medical services.
Expectations about Prices, Incomes, or Availability
Consumers who expect shortages or price hikes in the near future may rush to buy storable products now, thus boosting current demands. The onset of the Korean War in 1951 triggered memories of the shortages, spiraling prices, and tight rationing rampant during World War II; many Americans raced to stockpile sugar, flour, appliances, tires, and cars.
Expectations of higher income often induce people to splurge. You might be tempted to buy a car on credit before receiving your first paycheck from a new job—many people fall deeply in debt by spending income faster than they make it. On the other hand, people tend to postpone purchases when they expect prices to fall, or if they fear losing their jobs. Fears of recessions typically reduce consumption, causing overall demand to decline throughout an economy.
Expectations about government actions also affect buying patterns. Before Nutra-Sweet finally made the issue moot, the Food and Drug Administration repeatedly proposed bans on saccharin as a possible carcinogen. Each time the proposal resurfaced, shoppers stripped grocers' shelves. These consumers worried more about fat attacks than about greater risks from cancer.
Taxes, Subsidies, and Regulations
We have looked at how private behavior affect demands, but regulations and taxes or subsidies also shift demand. From a buyer's perspective demand relates the quantity bought to the price paid. Sellers, however, view demand as relating the price received and the quantity sold. These approaches usually yield similar results, but, as figure below shows, taxes can drive a wedge between the demand price buyers are willing to pay and the price the seller receives.
Consider a new tax of $1 per paperback. Buyers perceive no change in their willingness to purchase, so they view their demand for paperback books as being stable at D0. They are still willing to buy 400 million books annually at a demand price of $5. However, publishers view demand as having declined to D2 because the after-tax prices they receive drop $1 for each novel sold. They would receive only $4 per book if they priced books so that 400 million were bought.
Now suppose the government offered publishers a $1 subsidy per book sold to encourage literacy. Buyers would view their demand curves as stable at D0, but from the vantage points of publishers, demand would rise to D1. They would receive $1 more per paperback at every output level. Regulation may either stifle demand, as it does for such illicit goods as narcotics, or bolster it, as the effect of compulsory education on demands for chalk and erasers demonstrates. (In Chapter 4, we delve into more ways that government actions affect buying patterns.)
. To summarize, demand grows when: (a) preferences change so that people are more inclined to buy a good; (b) consumer incomes rise ( fall ) in the case of a normal (inferior) good; (c) the price of a substitute (complementary) good rises ( falls); (d) the population of consumers expands; (e) consumers expect higher prices or incomes, or anticipate shortages of the good, or when (f) favorable regulation is adopted, taxes are cut, or government subsidizes the good. Demands would decline if these changes were reversed.