In addition to the actual price of the product, there are many other factors that can affect the total quantity demanded for any product. A change in any one of these factors will cause demand to either increase or decrease, totally independent of a change in price. To illustrate, if the price of apples remained at $5kg, there are a range of factors that could cause the demand for apples to change. For example, the price of oranges could fall, resulting in consumers demanding fewer apples and more oranges. Alternatively, the government may have released a report that highlights the health giving benefits of apple consumption. With the exception of a change in price, some major factors that could lead to a change in the demand for a product are summarised below.
Income levels of consumers
Incomes are primarily earned by households for their contribution to production, the bulk of which occurs in the form of wages and salaries. When incomes increase, ceteris paribus, it will lead to an increase in the demand for most products because the purchasing power of consumers has increased.
Direct taxes are those levied directly against (or taken from) the income of households or businesses. The individual income tax applying to most income earners in Australia is the most common example of a direct tax. When these taxes increase, it will reduce the income available to households after income tax, called disposable income, thereby reducing purchasing power and decreasing the demand for many products.
Tastes and/or fashions
Many products offered for sale in markets will come into or go out of fashion. This particularly relates to clothing and footwear markets, where consumer preferences for specific items of clothing or footwear will change due to marketing or other factors.
The number or price of competing products (or substitutes)
In many markets, the goods or services are very similar, or even the same in terms of the benefits provided to consumers. We refer to this as the products being homogenous to some degree. For example, Caltex petrol is a very close substitute for BP petrol and many would regard petrol as a homogenous product. Accordingly, if there was an increase in the number of substitute products entering the market place, the demand for products offered by the established businesses should fall because some consumers will switch to the new substitutes.
The price of complementary products
When two products are typically consumed together, they are likely to be complements and considered ‘complementary products’. For example, commonly sugar is a complement for coffee, margarine is a complement for bread and an ‘app’ is a complement for a smartphone. If there is an increase in the price of a product such as coffee, we should expect a fall in the demand for a complementary product, such as sugar. This is because the higher price reduces the demand for coffee, and as fewer people drink coffee, the demand for sugar falls.
The cost of borrowing money (such as the interest rate charged on credit cards)
The cost of borrowing is usually measured by the level of interest rates attached to various forms of credit, such as credit card rates or even home loan rates. When interest rates increase it will lead to many households experiencing a fall in how much cash they have available for spending (also referred to as discretionary income). This is because their existing loans will usually cost more to repay -unless the interest rates are fixed on all their loans. As a consequence, households will tend to demand fewer goods and services across the board. In addition, the higher interest rates will reduce the demand for loans/credit (as the cost of credit is more expensive) and therefore reduce the demand for many products. Rising interest rates will have a particular effect on demand for those larger items that are often purchased using credit (either credit cards or loans), such as property, cars, televisions, fridges, freezers, holidays etc.
The confidence or expectations of consumers about the future
Consumer spending levels are always heavily influenced by their perceptions about future income levels or job prospects. During times when households are more pessimistic about their future income or wealth levels, consumer confidence in the economy will be low and the demand for most goods and services is likely to fall. This particularly applies to the demand for non-essential items (or luxuries) like restaurant meals, holidays and new cars.
Advertising and/or promotion of the product
Consumer or household demand is heavily influenced by the marketing and promotion of their products by the business sector. Effective marketing, part of which is advertising, serves to change consumer preferences and increase the demand for particular products. For example, Apple products are extremely popular for a range of reasons, an important one being the amount of marketing expenditure undertaken by Apple, which focuses on promoting the uniqueness of their products.
Season of the year/climatic factors/extreme weather events
This particularly relates to products that are weather dependent, such as tourism. During winter, for example, we would see an increase in the demand for Queensland holidays by people from Victoria and Tasmania. Similarly, during school holidays we see an increase in demand for tourism over all. Natural disasters caused by extreme weather events, such as cyclones and floods, will also tend to reduce the demand for products like tourism to those areas. [However, disasters can actually increase demand for those products needed for reconstruction (such as building materials).]
Government laws or regulations
Laws that prohibit smoking in enclosed spaces is one example of a law that intentionally reduces the demand for a particular product, namely cigarettes. Alternatively, there are other laws that prohibit the consumption of certain products, such as underage drinking laws that effectively reduce the demand for alcohol, and laws preventing individuals from carrying knives in public. There are numerous other regulations or laws that will directly (or indirectly) affect the demand for certain products.
Overseas economic conditions
Given that Australia operates in a global economy, the demand for some products will also come from overseas consumers (exports) and some of the goods and services we purchase come from overseas (imports). If one of Australia’s trading partners was to experience economic problems, such as low rates of economic growth, this is likely to reduce the demand for many of Australia’s exports. For example, if the rate of growth in the Chinese economy were to fall below 5% per annum, this is likely to reduce the demand for Australian iron and coal, which are the key ingredients used to make Chinese steel.
Population growth and demographic change
Australia’s growing population requires more goods and services every year and changes to the size and structure of the population affects the range of goods and services that are sold in markets. For example, Australia’s ageing population will result in demand increasing for certain products, including medicines (and other health related products), nursing homes and retirement services more generally.