In order to better understand the mechanism of development and functioning of a market economy, it is necessary to study non-price factors of supply and demand. This article will focus on the reasons why the sales volume of any product groups may change.
Law of Demand
The essence of this law comes down to the following: when prices for a particular product decrease, buyers show more interest in this product, that is, demand is growing. If prices go higher, the product is in less demand.
At the same time, there are price and non-price factors of demand that influence the degree of demand for the product. For example, if the cost of a commodity unit has decreased by 2 times, then, accordingly, sales should double. But it is important to take into account the fact that there are exceptions. Sometimes, after a price increase, a product is still used in great demand than before. This can happen when buyers expect prices to rise and try to stock up on products before their maximum price increases.
Another exception is as follows: when a decrease in value occurs, the relevance of the product is lost and sales decrease. This phenomenon is explained by the fact that a high price creates the prestige of a product and its demand. This is true for luxury perfumes, precious metals and stones, and jewelry.
In some cases, while the sales price of a certain product group remains unchanged, sales prices may change. To understand why this happens, it is worth considering the non-price factors that influence demand.
Availability of credit funds
When potential buyers have the opportunity to borrow funds, they, if necessary, supplement their own funds with credit. This serves as an additional motivator of demand.
This factor can expand consumer opportunities, since borrowed funds are nothing more than financial resources those legal entities who don't see for them anymore actual application. Thus, free lending can increase the level of demand while keeping the price constant.
Buyer Expectations
Non-price factors of demand inevitably include this condition for changes in consumer activity. If buyers expect changes in their income, lower or higher prices, their motivation to purchase a particular product may increase or decrease. By the way, the desire to purchase a certain product is also influenced by government actions regarding the availability of a specific product group (customs duties, etc.).
Non-price factors of demand changes in this situation may take the form of inflation expectations. It's about about the predicted rise in price of goods and, as a result, increased motivation to purchase them at the current price. Thus, demand increases, although prices actually remain unchanged.
Key areas of consumer expectations
Regarding this factor influencing demand, it is worth highlighting three key forms through which it can manifest itself:
Change in cash income. When potential buyers predict their financial future, they first consider the stability of their income, its growth or decline. If consumers expect to receive a stable income, then demand will not change significantly. But in the case of negative forecasts, the motivation to purchase those products that will soon become unavailable will increase (equipment, etc.). At the same time, expensive food products may lose their relevance as buyers are refocused on saving money.
Changing the list of available products. If you pay attention to non-price factors of supply and demand, you will notice that in certain periods some goods may be presented in wide range or be in short supply. When buyers expect a reduction in assortment and a lack of the required volume of relevant products, they will be motivated to make large purchases. Demand is correspondingly growing. If supply is stable and there are no preconditions for shortages, the volume of goods purchased will not change significantly.
Waiting for the price of the product to change. The situation here is similar: when buyers predict an increase in the cost of a product, they try to purchase the maximum possible volumes of the product in order to avoid high costs in future. As a result, demand is growing due to expectations of higher prices.
Tastes and needs of buyers
A factor such as need can be considered as the content of demand that forms it. At the same time, there is a limiting form - the solvency of someone who has certain needs that motivate the purchase of goods. When considering non-price factors of demand, it is worth understanding that when the size and composition of needs changes, the level of demand changes.
The dynamic development of some needs and the virtual complete disappearance of others cannot be ruled out. At the same time, the degree of relevance of goods is actively influenced by the tastes of buyers, which can also undergo changes under the influence of, say, fashion. If we consider such non-price factors of demand, completely different examples can be given. But the collections allow you to clearly see the influence of fashion wedding dresses: those models that were in demand last season are no longer of interest to consumers today.
Number of buyers
When the total population in a certain region grows, the consequence of this process is an increase in the number of able-bodied citizens who can purchase goods. This factor has an inevitable impact on demand. But even the very fact of having children already affects the level of sales of certain product groups - diapers, baby food etc. Accordingly, a decrease in population leads to a decrease in demand.
Fluctuations in prices for related goods
Non-price factors of demand for this format, although they relate to cost, but only indirectly. To better understand the essence of this form of influence on consumer motivation, it is worth considering two current options:
Changes in prices for products that complement each other. We are talking about goods that cannot be used separately, that is, the purchase of one inevitably entails the purchase of another. An example is the growth in car sales, which leads to an increase in demand for motor oil and gasoline. It is worth noting the fact that such groups of goods can also have the opposite effect on the interchangeable product. When fuel prices rise, people reduce the number of trips and, accordingly, buy motor oil and spare parts less often.
Changes in the cost of substitute goods. In this case, non-price factors of demand manifest themselves through changes in demand for a product that can replace a product that has become more expensive. It could be margarine and butter, jacket and coat, etc. In this case, a price shift for one product group inevitably entails a change in the level of relevance of a potential substitute (a more affordable autumn jacket is preferred to a noticeably more expensive coat).
But for such a factor to influence the level of demand, a significant change in price is necessary.
Bottom line
As you can see, price and non-price factors of demand play an important role in the formation of market processes that affect both the standard of living of consumers and the dynamics of development of producers.
The concept of supply and demand.
Self-regulation of the market occurs due to the interaction of market mechanisms: supply and demand. Therefore, to adapt to modern conditions knowledge on the formation of demand, supply and market prices is required.
Price in market economy is a signal that producers of goods and services rely on when making decisions about how much to produce. Consumers also focus on price when deciding which goods and in what quantity they can buy. The price benchmark plays an important role in economic development at the micro and macro levels.
The concept of demand.
Demand- This is the desire and ability of the buyer to purchase a product at a certain price.
Determining demand solely on the basis of buyer desires is impossible and erroneous. Not all customer desires can be realized. In addition to desire, you need to have the opportunity to buy them, i.e. have purchasing power.
Quantitatively, demand can be measured by the “magnitude of demand” indicator.
Quantity of demand is the quantity of a good that buyers are willing to buy at a given price at a certain time and place.
The pattern of changes in the quantity of demand is determined by the scale of demand and graphic representation in the form of a demand curve.
Example: The demand function for a product is given by the formula Qd = 30-P, where Qd is the quantity of demand (kg), P is the price (r.).
Based on this, it can be formulated law of demand :
“ All other things being equal, a change in the quantity demanded is inversely related to a change in the price of a product. The higher the price, the lower the quantity sold.”
Consequences of the law of demand. The rationale for the law of demand can be confirmed by the following phenomena in economics:
1. Price barrier: if the price rises, then for some part of the people the product becomes unavailable. The higher the price, the more insurmountable the price barrier becomes. To reduce it, sales are widely practiced.
2. Income effect: reducing the price of a product saves part of the buyer's income. In this case, income does not change, and saving money makes it possible to purchase a new product.
3. Substitution effect: If one of two interchangeable goods becomes cheaper, then the buyer will give preference to the cheaper product.
4. Principle of diminishing marginal utility: the utility of each subsequent purchase decreases compared to the first; for example: a bottle of Fanta on a hot afternoon. The buyer will agree to buy a less useful product only at a low price.
5. Giffen effect: English economist and statistician Robert Giffen (1837-1910) described a situation where an increase in price leads to an increase in demand. In families with low incomes, expenses for basic food products increase, despite their rise in price.
Non-price factors influencing changes in demand.
1. Quality and range of this product.
2. Income level of the population.
3. Prices for complementary goods.
4. Prices for goods are substitutes.
5. Fashion, tastes and preferences.
6. Climatic and seasonal conditions.
7. Expectation of changes in income and prices.
Price Elasticity of Demand– a measure of the sensitivity of demand to the dynamics of the price of a product, measured as the ratio of the change in the quantity of demand to the magnitude of the price change.
Price Elasticity of Demand ,
where Δ Q =Q1 – Q0 / Qс
Qс = Q1 + Q0 / 2
Δ Р = Р1 – Р0 / Рс
Р с = Р1 + Р0 / 2
Q0 - quantity demanded before price change
Q1 – quantity demanded after price change
P0 – initial price of the product
P1 - changed price of the product
Elasticity coefficient– it can be defined as the ratio of the percentage change in one quantity to the percentage change in another.
Price elasticity of demand characterizes the response of the magnitude of consumer demand to changes in the price of a product.
K>1 (elastic demand)
When the price decreases, the number of sales increases sharply and total revenue increases.
K=1 (unit elasticity)
The price decrease is offset by an increase in sales, and total revenue remains unchanged.
K<1 (неэластичный спрос)
Reducing the price slightly changes sales volume, and total revenue decreases.
Perfectly inelastic demand– consumers buy the same quantity of goods at any price level.
Perfectly elastic demand– consumers pay the same price for a product, regardless of the amount of demand. In this case, demand reacts very sensitively to price and, when the latter changes, either increases to infinity or drops to zero.
Goods with elastic demand include:
1. luxury goods;
2. goods whose cost is significant for the family budget;
3. easily replaceable goods.
Goods with inelastic demand include:
1. basic necessities;
2. hard-to-replace goods;
3. prestigious, unique and very expensive goods;
4. goods whose cost is insignificant for the family budget
Exercise:
1. Learn the theoretical part.
2. Solve the elasticity problem to the end, analyze the elasticity coefficient.
Demand depends not only on the price of a product. There are a number of other, non-price factors that shape consumer demand and changes in which cause changes in the demand for a product while its price remains unchanged.
Schedule 2-3. Change in demand for product X (action of non-price factors) (
Non-price factors that determine consumer demand include: tastes and advantages of consumers; number of consumers in the market; cash income of consumers; prices of other goods (fungible and interrelated) consumer expectations regarding future prices and incomes.
As a result of non-price demand factors, changes in demand occur, which means that consumers are ready
buy more or less of a given good at each of the possible previous prices. The action of these non-price factors, changes in demand are reflected in the graph by shifting the demand curve to the right or left. Under the influence of non-price factors that increase demand at each possible initial price, the demand curve P moves to the right, occupying the position of the curve P (graph 2-3). Conversely, when non-price factors influence a decrease in demand, the demand curve P moves to the left and takes the position of the Pi curve.
Let us consider the influence of the above non-price factors on changes in demand
Changing consumer tastes and preferences. Favorable changes in tastes, caused, for example, by advertising, fashion, will increase the demand for a given product. Conversely, negative information can reduce demand for a product.
CHANGE IN THE NUMBER OF BUYERS. As the number of consumers of this product increases, the demand for it also increases. For example, with an increase in the birth rate, the demand for diapers, diapers, baby food, and the like increases. Conversely, a decrease in the number of consumers of a given product causes a decrease in demand. For example, towards the end of the holiday season, the demand for the services of travel companies decreases.
CHANGE IN INCOME. Certain features in changes in demand for goods occur as a result of changes in consumer income. This specificity is associated with the division of goods into goods of the highest category (“normal products”) and goods of the lowest category. “Normal goods” include those for which demand increases with increasing consumer income or decreases with decreasing income (for example, durable goods, real estate, etc.). Low category goods include goods for which the demand decreases with increasing income or increases with decreasing income (for example, potatoes, cheap clothes and shoes).
PRICE CHANGE FOR OTHER (interchangeable and interrelated) GOODS. When the price of substitute good B increases, the demand for good X increases. And vice versa, with a decrease in the price of an interchangeable product B, the demand for product A decreases. Thus, with an increase in the price of domestic butter, the demand for foreign-made butter (margarine) will increase. As for the change in the price of one of the interrelated goods, the change in the price for it and the demand for a given product occurs in different directions. For example, with an increase in the price of cameras, there is a decrease in the demand for photographic film. A change in the price of an independent product does not cause any changes in the demand for this product. Thus, a change in the price of butter will not entail any changes in the demand for photographic film.
Changing expectations. Consumer expectations regarding price increases cause an increase in current demand for goods and vice versa. It becomes clear why high inflation rates and empty shelves in stores always “keep pace.” As for the expectation of future income growth, it manifests itself in the expansion of demand, and the expectation of a decrease in income puts the consumer under austerity today.
Therefore, an increase in demand for product X may be caused by the following reasons: favorable changes in consumer tastes; an increase in the number of consumers in the market; an increase in income if product X is a normal good; a decrease in income if product X is a lower category product; an increase in the price of an interchangeable product; a decrease in the price of an interrelated product; expectations of an increase in the price of goods X expectations of an increase in income. The reasons for the decrease in demand for product X may be: unfavorable changes in the tastes of buyers; reduction in the number of consumers of this product; decrease in income if product X is a normal good; income growth if product X is of the lowest category; reduction in price for an interchangeable product; an increase in the price of an interrelated product; expectation of a decrease in the price of product X expectation of a decrease in consumer income.
The term "demand" expresses the buyer's desire and ability to purchase a particular product. Therefore, demand always refers to effective need.
There is a distinction between individual and market demand:
Individual demand is the needs of a specific, individual buyer, expressed in monetary terms.
Market demand is the total demand of buyers of a given product at a given price.
Demand can be considered from quantitative and qualitative aspects. Demand from the quantitative side is the amount of goods consumed at the moment. Demand on the qualitative side is solvency, that is, the amount of money paid for the purchased product.
A change in demand is reflected in the law of demand, which can be formulated as follows: at high prices, the demand for a given product will be reduced compared to low prices, but “other things being equal.” Or, at low prices, demand will increase compared to high prices for the same product, but again, “all other things being equal.” Thus, the law of demand says that the volume of demand for any product is inversely proportional to the price of this product, “all other things being equal.”
The price of a given product is not the only factor that determines how much of that product a buyer is willing to purchase. There are other factors that influence the quantity of goods purchased: consumer income, prices of other goods and services, expected prices of goods in future periods, consumer tastes, etc.
A change in variables can affect the volume of demand, either upward or downward, depending on the specifics of the variable. An increase in the price of a product will lead to a reduction in its purchases, provided that all other variables - income, prices of other goods and services, price expectations and others remain constant.
Factors influencing demand Economic theory. / Ed. I.P. Nikolaeva. M., Unity. 2002. Pp. 98..
There are price and non-price factors (determinants) that influence demand. Course of economic theory. L.P. Kurakov, G.E. Yakovlev. M., 2004. Pp. 135.. Price factors include: the income effect, the substitution effect and the law of diminishing utility.
The income effect is an increase in the purchasing power of money as a result of a decrease in the price of a good. The buyer, as a result of a decrease in price, can buy more of a given product and at the same time can turn to other goods, since the purchasing power of money increases.
The substitution effect is a reduction in the price of a certain product, stimulating the buyer to purchase it instead of similar, but more expensive goods. At the same time, the buyer is inclined to replace expensive goods with cheaper alternative goods.
The Law of Diminishing Utility is the process of a buyer's utility or satisfaction decreasing with the purchase of each successive unit of a product.
Non-price factors include: changes in consumer tastes, changes in the number of buyers, changes in income prices for alternative goods, changes in consumer expectations.
Consumer tastes change under the influence of advertising, fashion, age, climate, etc.
Change in the number of buyers. The more consumers there are in the market, the higher the demand and vice versa.
Changes in buyer income. As income increases, the demand for more expensive and high-quality goods increases.
Changes in prices for alternative goods. A decrease in prices for interchangeable goods leads to an increase in demand for them.
Changes in consumer expectations. Unfavorable factors create expectations of higher prices, and thereby increase current demand.
Non-price factors of demand change
The concept of “demand and its change” is not identical to such concepts as “the influence of price on the quantity of sales” or “the influence of the quantity of goods on the change in their price.”
Demand is the buyer’s solvent need, expressed by the willingness to pay and actually purchase a particular good. In this sense, market pricing is a multidimensional process where purchase and sale is influenced not only by prices, not only by the quantity of goods delivered to markets, but also by the actual purchasing power, which itself is subject to change: growth, stabilization or decline. Demand is actually completed transactions for the purchase and sale of goods and benefits at a given price. A change in demand (its decrease or increase) can be expressed in a corresponding change in the volume of purchase and sale transactions, but it occurs under the influence of non-prices of goods in these transactions, the so-called non-price factors. Their influence seems to neutralize the influence of price; in any case, changes in the quantity of goods purchased occur at the existing price, and often regardless of its level and movement.
The non-price factors of demand that influence its changes (increase or decrease) should include, first of all, Level of cash income of consumers. For example, if the monetary income of consumers increases, then, other things being equal, the number of purchase and sale transactions in the markets increases; buyers buy a larger variety of goods, although their prices did not change and, before incomes increased, could be the main reason for their limited purchases. Another non-price factor in demand changes may be its corresponding Buyer expectations.
The presence or absence in markets may also be a non-price factor in demand changes. Interchangeable and mutually complementary goods. Interchangeable goods are identical in their consumer properties. Thanks to this, if some goods are unavailable in the markets (or are too expensive), they can be replaced by available (or more affordable) other goods with similar consumer properties. Interchangeable consumer goods can be, for example, drinks such as tea and coffee, since they are identical in Their consumer properties (hot, tonic) and other general properties. The list of examples of interchangeable goods can be continued. It is important that the presence on the markets of a whole variety of interchangeable goods helps to reduce the demand for each of them (and therefore their prices), since they are able to mutually replace other goods with identical properties in a given group.
Complementary goods in the consumer market can be, for example, sugar and other sweets in addition to drinks such as tea or coffee. The lack of sweets can cause a decrease in demand for these drinks, since not many consumers will agree to consume them unsweetened, despite their specific health benefits. Almost every benefit has its own “add-ons”, but their absence in the markets can significantly reduce consumer demand for the main group. For example, the demand for such a mutually complementary good as motor gasoline was significantly lower in the former USSR due to a shortage of cars and a limited number of them for personal use.
Subjective preferences and tastes of consumers(for example, the crowd effect, when buyers can rush to buy the product for which there is a line, etc.).
