SHORTAGE: A condition in the market in which the quantity demanded is greater than the quantity supplied at the existing price. A shortage occasionally goes by the terms excess demand and sellers' market. A shortage causes an increase in the equilibrium price.
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Five ceteris paribus factors that affect demand, but which are assumed constant when a demand curve is constructed. They are buyers' income, buyers' preferences, other prices, buyers' expectations, and number of buyers. Changes in the demand determinants cause shifts of the demand curve and disruptions of the market. Demand determinants are five ceteris paribus factors that are held constant when a demand curve is constructed. They are held constant to isolate the law of demand relation between demand price and quantity demanded. When the determinants change they cause a change in the location of the demand curve. In effect, demand determinants can be said to "determine" the position of the demand curve.
What They AreThe five ceteris paribus demand determinants are buyers' income, buyers' preferences, other prices, buyers' expectations, and number of buyers.
- Buyers' Income: The amount of income that buyers have available to spend on a good affects the ability to purchase a good. In general, income has a direct affect on the ability to buy a good, that is, more income means more buying. However, income can actually affect demand in two ways. For normal goods, more income means more demand. For inferior goods, however, more income means less demand.
- Buyers' Preferences: The satisfaction buyers obtain from a good, based on buyers' preferences, wants, needs, likes, and dislikes, affects the willingness to purchase a good. If a good provides greater satisfaction, then buyers are inclined to purchase more.
- Other Prices: The demand for one good is based on the prices paid for other goods purchased by buyers. A change in the price of a substitute good (or substitute-in-consumption) induces buyers to alter the mix of goods purchased. An increase in the price of a substitute motivates buyers to buy more of one good and less of the substitute good. A change in the price of a complement good (or complement-in-consumption) induces buyers to demand more or less of both goods. An increase in the price of a complement motivates buyers to buy less of one good as they buy less of the complement good.
- Buyers' Expectations: The decision to purchase a good today depends on expectations of future prices. Buyers seek to purchase the good at the lowest possible price. If buyers expect the price to decline in the future, they are inclined to buy less now. If they expect the price to rise in the future, they are inclined to buy more now.
- Number of Buyers: The number of buyers willing and able to buy a good affects the overall demand. With more buyers, there is more demand. With fewer buyers, there is less demand.
How They WorkThese five demand determinants cause the demand curve to shift. This can be illustrated using the negatively-sloped demand curve for Wacky Willy Stuffed Amigos presented in the exhibit below. This demand curve captures the specific one-to-one, law of demand relation between demand price and quantity demanded. The demand determinants are assumed to remain constant with the construction of this demand curve. When they change, the curve shifts.
The demand determinants are assumed constant for two reasons:
Reason number two provides a powerful analytical tool. By turning demand determinants off and on, allowing each to change one at a time, a more thorough understanding of the demand side of the market can be had.
- One: To isolate the law of demand relation between demand price and quantity demanded
- Two: To systematically analyze what happens to demand when each determinant changes.
Now, consider how changes in the demand determinants shift the demand curve. A change in any of the five determinants can cause either an increase in demand or a decrease in demand.
- Increase in Demand: An increase in demand is a rightward shift of the demand curve. An increase in demand means that for any price, for every price, buyers are willing and able to buy more of the good. Click the [Increase] button to demonstrate.
- Decrease in Demand: A decrease in demand is a leftward shift of the demand curve. A decrease in demand means that for any price, for every price, buyers are willing and able to buy less of the good. Click the [Decrease] button to demonstrate.
Two ChangesShifts of the demand curve caused by changes in the demand determinants suggests two related notions--a change in demand and a change in quantity demanded.
- A Change in Demand: This a change in the overall demand relation, a change in all price-quantity pairs. It is caused by a change in one of the five demand determinants and is indicated by a shift of the demand curve.
- A Change in Quantity Demanded: This is a change in the specific amount of the good that buyers are willing and able to purchase. It is caused by a change in the demand price and is indicated by a movement along the demand curve from one point to another.
DEMAND DETERMINANTS, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2024. [Accessed: February 27, 2024].
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