IB Economics - Non-Price Determinants of Demand

This IB economics study note covers non-price determinants of demand. Non-price determinants of demand are factors other than the price of the good or service itself that can cause the demand curve to shift, either increasing or decreasing the quantity demanded at every price level.

Key Non-Price Determinants

1. Changes in Income

• Normal Goods:
  • Definition: Goods for which demand increases as consumer income rises.
  • Explanation: As people have more disposable income, they are more likely to purchase more or higher-quality goods.
  • Example: Luxury cars, dining out at restaurants, and branded clothing.
• Inferior Goods:
  • Definition: Goods for which demand decreases as consumer income rises.
  • Explanation: As income increases, consumers tend to buy less of these goods, opting for more expensive substitutes.
  • Example: Generic brands, public transportation, and instant noodles.

2. Preferences and Tastes

• Definition: Changes in consumer preferences can increase or decrease demand for certain goods.
• Explanation: Influences such as advertising, trends, health considerations, and cultural factors can shift demand.
• Example: The rise in demand for organic food products due to increasing health consciousness.

3. Prices of Related Goods

• Substitutes:
  • Definition: Goods that can be used in place of another.
  • Explanation: An increase in the price of one good can lead to an increase in demand for its substitute.
  • Example: If the price of coffee rises, the demand for tea might increase as consumers switch to a cheaper alternative.
• Complements:
  • Definition: Goods that are used together.
  • Explanation: An increase in the price of one good can lead to a decrease in demand for its complement.
  • Example: If the price of printers rises, the demand for printer ink might decrease as fewer people buy printers.

4. Demographic Changes

• Definition: Changes in the size and composition of the population affect demand.
• Explanation: Factors such as age distribution, population growth, and migration can influence the demand for certain goods and services.
• Example: An aging population might increase the demand for healthcare services and retirement homes.

Real-World Examples

• Income Change: During economic booms, the demand for normal goods like new cars and luxury vacations tends to rise.
• Preference Shift: Increased environmental awareness has led to higher demand for electric vehicles.
• Substitutes: The rise in popularity of streaming services like Netflix has reduced demand for cable TV subscriptions.
• Complements: The demand for smartphones often boosts the demand for related accessories like cases and earbuds.
• Demographic Change: Urbanization in developing countries increases demand for housing and infrastructure.

Diagrams

• Shifts in the Demand Curve:
  • Rightward shift indicates an increase in demand.
  • Leftward shift indicates a decrease in demand.

Figure: Shifts in the demand curve represent changes in quantity demanded at every price level due to non-price determinants.

Glossary of Key Terms

• Complements: Goods that are typically used together, so the demand for one is linked to the demand for the other.
• Demographic Changes: Changes in the characteristics of a population, such as age, gender, and income distribution.
• Inferior Goods: Goods for which demand decreases as consumer income rises.
• Normal Goods: Goods for which demand increases as consumer income rises.
• Preferences: Consumer tastes and preferences that affect their purchasing behavior.
• Substitutes: Goods that can replace each other, so an increase in the price of one can lead to an increase in demand for the other.

Related Topics for Further Exploration

1. Price Elasticity of Demand: How sensitive the quantity demanded of a good is to changes in its price.
2. Income Elasticity of Demand: How changes in income levels affect the quantity demanded of various goods.
3. Cross-Price Elasticity of Demand: How the price of one good affects the demand for another good.
4. Consumer Behavior: The study of how individual preferences, decision-making processes, and cultural factors influence demand.
5. Market Equilibrium: How supply and demand interact to determine prices and quantities in the market.

Possible IB Economics Essay-Style Questions

1. Discuss how changes in consumer income affect the demand for normal and inferior goods. Use real-world examples to illustrate your points.
2. Explain how changes in preferences and tastes can lead to shifts in the demand curve. Provide examples to support your explanation.
3. Analyze the impact of the prices of related goods (substitutes and complements) on the demand for a product. Use diagrams and examples in your answer.
4. Evaluate the role of demographic changes in influencing the demand for goods and services. Provide specific examples to support your argument.
5. How do non-price determinants of demand contribute to shifts in the market demand curve? Discuss with reference to real-world examples and economic theory.