What are the four factors that affect demand

Normally, the demand for a product declines as its price goes up. Conversely, demand increases as its price declines. However, other factors can cause the demand curve to shift to either the right, which indicates increased demand, or to the left, which indicates decreased demand. These factors represent fundamental shifts in the marketplace.

People buy more of a product when their income level goes up. For example, as incomes increase, consumers are more likely to buy brand-name groceries instead of generic products. Products that shift the demand curve to the right are known as "normal" goods.

In the short term, prices stay the same, but in the long run, sellers react to the increased demand for normal goods by raising prices.

Products that shift the demand curve to the left with increases in consumers' income are called "inferior" goods. Demand for these products goes down as consumers earn more money.

An example is a bus ride. If people can't afford a car, they take a bus, but, when their incomes go up, and they can afford to buy a car, they ride the buses less often.

Changes in fashion are good examples of changes in consumer tastes. Styles of clothes are constantly changing. Fashions that were popular in the '60s are no longer marketable to today's consumers.

Sometimes, goods can be substituted for one another. A change in the price of one good changes the demand for the other good.

Take ice cream, for example. If the price of ice cream drops, people buy more of it and buy fewer candy bars. They satisfy their needs for sweets at a lower price. The demand curve for candy bars shifts to the left.

The same process works for beef and chicken. When beef prices go up, people start buying more chicken. The demand curve for beef shifts to the left as people buy less of it.

Buyers' expectations about future prices can affect the demand curve. If consumers expect prices to increase, they buy more of a product now, and the demand curve moves to the right.

On the other hand, if consumers expect a product to go on sale soon, they delay their purchases, and the demand curve shifts to the right.

Marketers pay attention to these four factors that affect demand. Changes in demand curves have implications for pricing strategies, marketing campaigns and production scheduling.

The consumer goods sector includes a wide range of retail products purchased by consumers, from staples such as food and clothing to luxury items such as jewelry and electronics. While overall demand for food is not likely to fluctuate wildly—although the specific foods consumers purchase can vary significantly under different economic conditions—the level of consumer spending on more optional purchases, such as automobiles and electronics, varies greatly depending on a number of economic factors. The economic factors that most affect the demand for consumer goods are employment, wages, prices/inflation, interest rates, and consumer confidence.

One of the main factors influencing the demand for consumer goods is the level of employment. The more people there are receiving a steady income and expecting to continue receiving one, the more people there are to make discretionary spending purchases. Therefore, the monthly unemployment rate report is one economic leading indicator that gives clues to demand for consumer goods.

The level of wages also affects consumer spending. If wages are steadily rising, consumers generally have more discretionary income to spend. If wages are stagnant or falling, demand for optional consumer goods is likely to fall. Median income is one of the best indicators of the condition of wages for American workers.

Prices, affected by the rate of inflation, naturally impact consumer spending on goods significantly. This is one reason the producer price index (PPI) and the consumer price index (CPI) are considered leading economic indicators.Higher inflation rates erode purchasing power, making it less likely that consumers have excess income to spend after covering basic expenses such as food and housing. Higher price tags on consumer goods also deter spending.

Interest rates can also impact the level of spending on consumer goods substantially. Many higher-end consumer goods, such as automobiles or jewelry, are often purchased by consumers on credit. Higher interest rates make such purchases substantially more expensive and therefore deter these expenditures. Higher interest rates generally mean tighter credit as well, making it more difficult for consumers to obtain the necessary financing for major purchases such as new cars. Consumers often postpone purchasing luxury items until more favorable credit terms are available.

Consumer confidence is another important factor affecting the demand for consumer goods. Regardless of their current financial situation, consumers are more likely to purchase greater amounts of consumer goods when they feel confident about both the overall condition of the economy and about their personal financial future. High levels of consumer confidence can especially affect consumers' inclination to make major purchases and to use credit to make purchases.

Overall, demand for consumer goods increases when the economy producing the goods is growing. An economy showing good overall growth and continuing prospects for steady growth is usually accompanied by corresponding growth in the demand for goods and services.

Consumers participate in, help guide and are ultimately some of the benefactors of the invisible hand of the market. Through competition for scarce resources, consumers indirectly inform producers about what goods and services to provide and in what quantity they should be provided. As a result of their collective demands, preferences, and spending, consumers tend to receive cheaper, better and more goods and services over time, with all else being equal.

In economics, the term "invisible hand" is used to describe the mechanisms that lead to spontaneous social benefits in a free market economy. These processes are "spontaneous" in the sense that they take place without dictate from a central authority, such as the government. The term was taken from a line in Adam Smith's famous book, An Inquiry into the Nature and Causes of the Wealth of Nations.

Milton Friedman, an American economist, and professor at the University of Chicago during the second half of the 20th century provided perhaps the best-known description of the role of the invisible hand. Friedman noted that it was "cooperation without coercion" and individual people, guided by their own self-interest, are guided to promote the general welfare of society at large, which was not part of their intention.

Much of the spontaneous order—and many of the benefits—of the market arise from different producers and consumers wanting to engage in mutually beneficial trades. Since all voluntary economic exchanges require each party to believe it benefits in some way, even psychologically, and because every consumer and producer has competitors to contend with, the overall standard of living is raised through the pursuit of separate interests.

There are two primary mechanisms by which consumers affect—and are affected by—the invisible hand. The first mechanism is initiated through competitive bidding for various goods and services. Through decisions about what to buy and what not to buy, and at what prices those exchanges are acceptable, consumers express value to producers. Producers then compete with one another to organize resources and capital in such a way to provide those goods and services to consumers for a profit. The scarce resources in the economy are continuously rearranged and redeployed to maximize efficiency.

The second major effect arrives through the risk-taking, discovery, and innovations that occur as competitors consistently seek ways to maximize their productive capital. Increases in productivity are naturally deflationary, meaning consumers can purchase relatively more goods for relatively fewer monetary units. This has the effect of raising the standard of living, affording consumers more wealth even when their incomes remain the same.