Engineering Economics and Finance

1. FACTORS AFFECTING
DEMAND

2. WHY DOES THE DEMAND CHANGE
• Even though the focus in economics is on the relationship between the price of a
product and how much consumers are willing and able to buy, it is important to
examine all of the factors that affect the demand for a good or service.
• Because these changes can be difficult to predict, short lived, or relative, Demand
Schedules and Demand Curve Graphs cannot adequately address them as they
show change in quantity demanded in relation to the single factor of price.
• Changes in these other aspects do not cause movement along a Demand Curve;
they move the Demand Curve itself!Changes that increase overall demand shift the
Demand Curve to the right as the quantity demanded increases at all prices.
• Changes that decrease overall demand shift the Demand Curve to the left as the
quantity demanded decreases at all prices

3. FACTORS THAT CHANGE DEMAND
• Factors that directly affect Demand can include:
• Consumer Income
• Price of the Product
• Expectations
• The Price of Related Goods
• Population Change
• Tastes and Trend

4. CONSUMERS INCOME
• Increases in consumer income generally lead to an increase in the demand
for goods, while decreases in consumer income have the opposite effect.
• Goods whose demand increases as income increases are referred to as
Normal Goods.
• Goods whose demand decreases as income increases are referred to as
Inferior Goods because they are replaced by higher quality goods.
• The term inferior just means that there is an inverse relationship between
one's income and the demand for that good. Also, whether a good is normal
or inferior may be different from person to person. A product may be a
normal good for you, but an inferior good for another person.

5. • Examples:
• DVD’s = Normal
• Houses = Normal
• Generic = Inferior

6. • There is an inverse relationship between the price of a product and the
amount of that product consumers are willing and able to buy. Consumers
want to buy more of a product at a low price and less of a product at a high
price. This inverse relationship between price and the amount consumers
are willing and able to buy is often referred to as The Law of Demand.
Price of the Product

7. EXPECTATIONS
• There is an inverse relationship between the price of
a product and the amount of that product consumers
are willing and able to buy. Consumers want to buy
more of a product at a low price and less of a product
at a high price. This inverse relationship between
price and the amount consumers are willing and able
to buy is often referred to as The Law of Demand.

8. EXPECTATIONS
• Consumer expectations regarding price changes
directly affect demand.
• If consumers feel prices for a good will drop soon,
they will wait to purchase the good at a later date
and a lower price.
• If prices are expected to rise, consumers will
purchase the good now as opposed to waiting and
risking paying more.
• Examples:
• Gasoline
• Non-Perishable Food
• Cars and Houses

9. • As with income, the effect that this has on the amount that one is willing and
able to buy depends on the type of good we're talking about. when two
goods are complements, there is an inverse relationship between the price
of one good and the demand for the other good. On the other hand, some
goods are considered to be substitutes for one another: you don't consume
both of them together, but instead choose to consume one or the other.
when two goods are substitutes, there is a positive relationship between the
price of one good and the demand for the other good.
The Price of Related Goods

10. • As more or fewer consumers enter the market this has a direct effect on the
amount of a product that consumers (in general) are willing and able to buy.
• As population increases, the demand for goods increases as well because
each member of the population has needs to be filled.
• However, these needs change over time as segments of the population age
and their wants and needs change
• Examples:
• Education
• Recreational Materials
• Housing
POPULATION CHANGE

11. • There are all kinds of things that can change one's tastes or preferences that
cause people to want to buy more or less of a product.
• For example, if a celebrity endorses a new product, this may increase the
demand for a product.
• On the other hand, if a new health study comes out saying something is bad
for your health, this may decrease the demand for the product. This also
affects the demand of a product.
TASTES AND TRENDS

13. • Consumers are notoriously fickle about the types and styles of goods that
they consume.
• Goods that are extremely popular one year may have little or no demand on
them the next.
• Predicting these trends, and adapting production to them, is extremely
difficult.
• Examples:
• Beanie Babies
• Pokimon Cards
• Tie-Dye Clothe