Non-Price Determinants of Demand

What are a Non-Price Determinants of Demand?

Non-price Determinants of Demand refers to the factors other than the current price that can potentially influence the demand of a service or product and hence result in a shift in its demand curve. In other words, these factors are very crucial economically as they can impact the demand for a service or product, irrespective of its current price.

Explanation

It is very commonly seen that economists usually emphasize the importance of price in the determination of demandDetermination Of DemandDemand is an economic principle that explains the relationship between prices and customer behaviour as a result of price changes for products and services. Many elements in the economy influence demand for goods and services; these elements are known as determinants of demand, and they include the price of commodities, the price of substitutes, buyer's taste, and changes in buyer's income.read more for a service or product in the market. Consequently, we find that price is put along with the demand in almost all of the demand curves. But various other factors also affect the influence of the demand for a service or product. Various research proves that price is not the only variable that can affect the demand curveDemand CurveDemand Curve is a graphical representation of the relationship between the prices of goods and demand quantity and is usually inversely proportionate. That means higher the price, lower the demand. It determines the law of demand i.e. as the price increases, demand decreases keeping all other things equal.read more. The demand curve can also be affected by several other underlying determinants called the non-price factors.

Non-Price Determinants of Demand

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Examples

Example #1

One of the major non-price factors to impact the demand curve is income. So, let us take an example to illustrate the influence of income on demand for organic vegetables, which is considered to be a product with elastic demandElastic DemandElastic demand, also known as demand elasticity, refers to the tendency of customers to buy in large quantities when the price of a product falls, and vice versa. It denotes that the product's demand is susceptible and inversely proportional to its price.read more.

During a decade, the per capita incomePer Capita IncomeThe per capita income formula depicts the average income of a region computed by dividing the total income of that area by the total population of the region. It is used to figure out the average income of a city, provision, state, country, etc.read more of a particular country witnessed significant improvement that resulted in a noticeable shift in the lifestyle. Consequently, the per capita consumption of organic vegetables also saw a drastic increase. Here we can see that income (non-price factor) has resulted in the change in demand for organic vegetables.

Example #2

Now, let us look at another non-price factor (the price of complementary goods) to illustrate the concept. Let us take the example of the demand for passenger vehicles and the price of gasoline.

When there is a significant decline in the price of gasoline, it can be seen that there is an increase in the purchase of passenger vehicles as people prefer to use their own vehicles rather than shared commute arrangements. Here we can see that price of gasoline (non-price factor) has resulted in the change in demand for passenger vehicles.

Non-Price Determinants of Demand Graph

The non-price determinants of demand can be classified into four major categories:

#1 – Expected Price

When the price of a particular product is expected to drop soon, then it is likely that the demand for that product may fall or become flat until the expected change crystallize. Similarly, in case the price of that product is expected to increase, then its demand may surge in the short term in anticipation of the increase.

Non Price Determinants of Demand Graph 1

Another critical non-price determinant of demand is the price of related goods – substitute goodsSubstitute GoodsAny alternative, replacement, or backup of a primary product in the market is referred to as a substitute product. It refers to any commodity or combination of goods that might be used in place of a more popular item in normal circumstances without affecting the composition, appearance, or utility.read more and complementary goods.

Substitute goods refer to those goods whose price change has an inverse impact on the demand for related goods. If the price of substitute goods increases, then the demand for the related good falls and vice versa.

Non Price Determinants of Demand Graph 2

On the other hand, complementary goods refer to those goods whose price change has a direct impact on the demand for related goods. Unlike substitute goods, the price of complementary goods and the demand for related goods move in tandem.

Graph 2-1

#3 – Income

Consumer income is one of the most important non-price determinants of demand for normal goods and inferior goods.

Normal goods are those goods whose demand moves in sync with the income. When the consumer income increases the demand for normal goods also increases accordingly, while the demand decreases or ceases entirely in case of a decline in income.

Graph 3

Inferior goods refer to those goods that consumers tend to avoid as their income increases. Please note that inferior goods are not always low quality, but generally, the demand for such goods declines with the increase in consumer income and vice versa. Basically, an inverse relationship between demand and consumer income.

Graph 3-1

#4 – Number of Potential Consumers

The number of potential consumers indicates the portion of the population that are potential buyers in any given market. When the number of potential consumers increases, then it is likely that the demand for the available goods, products, and services will also increase. Similarly, a decrease in the number of potential consumers results in a decrease in demand.

Graph 4

Importance

From the perspective of companies who intend to market their product effectively, the non-price determinants of demand play a very crucial part in developing promotion and marketing strategies. These non-price factors can change at any given point in a product’s life span due to innumerable things, such as climate, branding, demography, etc. As such, it is so important to keep track of these factors over and above the primary pricing factor to market the product efficiently.

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