FACTOR 4 Consumer Expectations

Your expectations for the future can affect your buying habits today. If you think the price of a good or service will change, that expectation can determine whether you buy it now or wait until later.

Automobiles usually go on sale at the end of summer because dealers want to get rid of this year’s models before the new models arrive. Would you expect demand for new cars to be higher in May, before the sales, or in August, during the sales? It is higher in August because consumers expect the sales and often choose to wait for them.

FACTOR 5 Substitute Goods

Goods and services that can be used in place of other goods and services to satisfy consumer wants are called substitutes. Because the products are interchangeable, if the price of a substitute drops, people will choose to buy it instead of the original item.

Demand for the substitute will increase while demand for the original item decreases. People may also turn to substitutes if the price for the original item becomes too high. Again, demand for the substitute rises while demand for the original item drops.

Substitutes can be used in place of each other. For example, when gasoline prices are high, some people decide to commute to school by bus or train. When gasoline prices are low, a higher number of people choose to drive instead of to take public transportation. As you can see from that example, when the price of one good rises, demand for it will drop while demand for its substitute will rise.

FACTOR 6 Complementary Goods

When the use of one product increases the use of another product, the two products are called complements. In contrast to substitutes, complements are goods or services that work in tandem with each other. An increase in demand for one will cause an increase in demand for the other. Likewise, a decrease in demand for one will cause a decrease in demand for the other.

One example is CDs and CD players. Consumers who bought CD players also demanded CDs to play on them. And, as CDs became more popular, demand for CD players grew until they began to appear in places they had never been before, such as in the family minivan.

Therefore, with complements, if the price of one product changes, demand for both products will change in exactly the same way. If the price for one product rises, demand for both will drop. Conversely, if the price for one product drops, demand for both will rise.

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FACTOR 2 Market Size	\|	The law of supply

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