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Non-Price Determinants of Demand

Updated on January 31, 2024
Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

What are Non-Price Determinants of Demand?

Non-price determinants of demand refer to factors other than the current price that can potentially influence the need for a service or product, resulting 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.

Key Takeaways

  • The term “non-price determinants of demand” refers to elements outside the current price that could influence the need for a service or product, shifting the demand curve.
  • Expected price, price of comparable items, income, and quantity of prospective consumers are the four main subcategories of the non-price drivers of demand.
  • The non-price determinants of demand are crucial for businesses when developing promotion and marketing strategies if they wish to promote their products effectively.

Explanation

It is very commonly seen that economists usually emphasize the importance of price in the determining of demand Determining 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 added to the demand in almost all demand curves. But various other factors also affect the need for a service or product. Moreover, additional research proves that price is not the only variable affecting 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 a product with elastic demandElastic DemandElastic demand refers to an economic concept which states that the demand for a good or service changes with the fluctuations in its price. If a product has an elastic demand, it will have more buyers when its price goes down and vice-versa. read more.

During a decade, the per capita income Per 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 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 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 cost 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 vehicles rather than shared commute arrangements. So, here we can see that the 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 crystallizes. Similarly, if 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 goods Substitute 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 are those whose price changePrice ChangePrice change in finance is the difference between the initial and final values of an asset, security, or commodity over a particular trading period.read more has an inverse impact on the demand for related goods. For example, if the price of substitute goods increases, the demand for the associated goods falls and vice versa.

Non Price Determinants of Demand Graph 2

On the other hand, complementary goodsComplementary GoodsA complementary good is one whose usage is directly related to the usage of another linked or associated good or a paired good i.e. we can say two goods are complementary to each other. read more are those whose price change directly impacts the demand for related goods. Unlike substitute goods, the price of complementary goods and the demand for associated goods move in tandem.

Graph 2-1

#3 – Income

Consumer income is one of the most important non-price determinants of demand. In addition, consumer income is one of the most important non-price determinants of demand for normal 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.

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 goodsInferior GoodsAn inferior good is a category of products whose demand declines as consumer income rises. When a country’s economy grows, so does its citizens’ income, causing them to move to more expensive alternatives or brands while disregarding those they previously used to purchase.read more are those that consumers tend to avoid as their income increases. Please note that cheap goods are not always low quality, but generally, the demand for such goods declines with increased consumer income and vice versa. 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 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 potential consumers results in a demand reduction. 

Graph 4

Importance

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

Frequently Asked Questions (FAQs)

What happens when a non-price determinant of demand changes?

When a non-price determinant of demand changes, the demand curve shifts horizontally. An excess occurs in the market when the quantity supplied at a given price increases than the quantity demanded at the same price.

What non-price determinants can affect a product’s level of demand?

Complementary goods, substitute goods’ prices, tastes and preferences, income, and expectations can affect a product’s level of demand.

How do tastes and preferences act as nonprice determinants of demand?

Tastes and preferences act as nonprice determinants of demand by affecting the amount of a product or service that consumers can purchase at various price levels. For instance, if consumers place a high value on organic or environmentally friendly products, they may be willing to pay a premium price for products that meet those criteria.

What are the non-price determinants of demand and supply?

The non-price determinants of demand are –
The expected price
Price of other goods
Income
Tastes and preferences
The number of potential consumers
The non-price determinants of supply are the cost of production, number of suppliers, technology, and expected future prices. 

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