Answer to Question #137457 in Economics for Khanh Ngoc Nguyen

Question

One school of thought holds that development is a natural result of reducing government interference with the markets. How can this be justified?

Answer 1

DEMAND FACTORS (demand determinants) - factors that affect the amount of demand. The main determinant is the price of a product, which affects demand in accordance with the law of demand. In addition, there are a number of other factors that are commonly referred to as non-price factors of demand.

NON-PRICE DEMAND FACTORS (non-price determinants of demand) are factors that affect the amount of demand and are not related to the price of a product. When non-price factors change, the value of demand changes at given price values; thus, the demand curve changes. In this case, one usually speaks of a shift in the demand curve. With an increase in demand, the curve shifts to the right, with a decrease - to the left.

Non-price factors include:

Consumer income. As consumer income increases, demand usually increases. However, it should be borne in mind that this changes the structure of consumption, and therefore some goods do not obey the general pattern. Thus, the demand for the cheapest, low-quality goods (for example, for second-hand clothes, shoes made of cheap leatherette, low-grade food products), on the contrary, is decreasing, since people who were forced to buy these goods are now able to purchase better quality products.

Tastes, fashion. Changes in consumer tastes under the influence of fashion, advertising, and other factors cause a corresponding change in the demand for the product. With an increase in consumer preferences, the demand for a product grows, with a decrease, it decreases. This factor has the greatest impact on fashion-prone goods (clothing, shoes), and the least impact on durable goods.

Number of consumers. An increase in the number of buyers in the market determines an increase in demand, a decrease in the number of buyers leads to a decrease in demand. The number of consumers can change due to various factors, for example, population changes associated with natural increase or migration. In the context of international trade, the number of consumers grows when goods are promoted to the markets of other countries; on the contrary, the reduction of export and import quotas, the introduction of an economic embargo reduces the number of consumers of goods on the world market.

Substitute prices. Almost all products on the market have substitute products that perform the same or nearly the same functions. An example would be TVs from different manufacturers, different brands of cars. Substitute goods divide the market for this type of goods. In the event that the price of one of the interchangeable goods rises, some of its buyers, for reasons of economy, will switch to another, cheaper product; if the price decreases, then, on the contrary, it will attract buyers from among those using substitute goods.

Other non-price factors of demand include:

Consumer expectations. Demand can change depending on consumer expectations about future commodity prices, commodity availability and future income. So, in extreme economic situations, the demand for essential goods (salt, matches, soap) increases significantly, since buyers are afraid of their disappearance from the shelves. The same happens when the expectation of an increase in prices for certain goods. On the contrary, in anticipation of lower prices (for example, for vegetables of the new harvest), demand decreases. However, consumer expectations are difficult to account for, and therefore this factor is not used in the model.

The prices of complementary products. Some products have complementary products. For example, for cameras, these will be photographic films or memory cards. The prices of complementary goods affect demand in the opposite way. So, if the prices for memory cards increase significantly, then the demand for digital cameras will decrease, and vice versa. Not all products have complementary products, so this factor is not used in the model.