Demand is the quantity of a good or service that consumers are willing and able to purchase at various prices during a given period.
Demand Curve
A demand curve shows the relationship between the price of a good and the quantity demanded.
It normally slopes downward from left to right.
The demand curve generally slopes downward, with:
- Price on the vertical axis.
- Quantity Demanded on the horizontal axis.
Law of Demand
Holding other factors constant, when the price of a good or service increases, quantity demanded decreases. When the price decreases, quantity demanded increases.
Therefore, price and quantity demanded are inversely related.
Change in Quantity Demanded
A change in quantity demanded occurs because of a change in the price of the good itself.
It causes a movement along the same demand curve.
- Price increases → quantity demanded decreases.
- Price decreases → quantity demanded increases.
Why Does the Law of Demand Occur?
Substitution Effect
When the price of a good increases, consumers tend to substitute relatively cheaper alternatives.
Income Effect
When the price of a good increases, the consumer’s purchasing power or real income decreases, so the consumer may buy less of the good.
Demand Function
The relationship between quantity demanded and its determinants can be represented as:
Where:
- = quantity demanded of good X
- = price of good X
- = price of related goods
- = consumer income
- = consumer tastes and preferences
- = advertising effects
- = other unknown influences
Determinants of Demand
A change in a non-price determinant causes the demand curve to shift.
Main determinants include:
- Number of consumers / population
- Consumer income
- Consumer tastes and preferences
- Prices of related goods
- Expectations about the future
- Advertising and other influences
Income
For a normal good:
Income increases → Demand increases → Curve shifts right.
Income decreases → Demand decreases → Curve shifts left.
Population
Population increases → Demand increases → Curve shifts right.
Consumer Preferences
If a product becomes more fashionable or desirable, demand increases and the curve shifts right.
Prices of Related Goods
Substitutes
If the price of a substitute increases, demand for the original good increases.
Example:
Price of coffee ↑ → Demand for tea ↑
Complements
If the price of a complement increases, demand for the original good decreases.
Example:
Price of cars ↑ → Demand for petrol ↓
Change in Demand
A change in any non-price determinant causes the entire demand curve to shift.
| Change | Curve Shift | Equilibrium Price | Equilibrium Quantity | |
|---|---|---|---|---|
| Increase in Demand | Demand curve shifts right | ↑ | ↑ | |
| Decrease in Demand | Demand curve shifts left | ↓ | ↓ | ↓ |
Demand Schedule
A demand schedule is a table showing the quantities consumers are willing and able to purchase at different prices.
As price falls, quantity demanded generally increases.
Movement Along vs Shift of Demand Curve
| Change | Result |
|---|---|
| Change in price of the good | Movement along demand curve |
| Change in income | Shift of demand curve |
| Change in population | Shift of demand curve |
| Change in preferences | Shift of demand curve |
| Change in price of related goods | Shift of demand curve |
