Demand drives economic growth. Businesses want to increase demand so they can improve profits. Governments and central banks boost demand to end recessions. They slow it during the expansion phase of the business cycle to combat inflation. If you offer any paid services, even you try to raise demand for them.
What drives demand? In economics, there are five determinants of individual demand and a sixth for aggregate demand.
The Five Determinants of Demand
The five determinants of demand are:
The price of the good or service.
Income of buyers.
Prices of related goods or services. These are either complementary, those purchased along with a particular good or service, or substitutes, those purchased instead of a certain good or service.
Tastes or preferences of consumers.
Expectations. These are usually about whether the price will go up.
For aggregate demand, the number of buyers in the market is the sixth determinant.
Demand Equation or Function
This equation expresses the relationship between demand and its five determinants:
qD = f (price, income, prices of related goods, tastes, expectations)
It says that the quantity demanded of a product is a function of five factors: price, income of the buyer, the price of related goods, the tastes of the consumer, and any expectation the consumer has of future supply, prices, etc.
How Each Determinant Affects Demand
You can understand how each determinant affects demand if you first assume that all the other determinants don't change. That principle is called ceteris paribus or “all other things being equal.” So, ceteris paribus, here's how each element affects demand.
Price. The law of demand states that when prices rise, the quantity of demand falls. That also means that when prices drop, demand will grow. People base their purchasing decisions on price if all other things are equal. The exact quantity bought for each price level is described in the demand schedule. It's then plotted on a graph to show the demand curve.