Demand

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.

The substitution effect is the response to a change in relative price, with other things constant.

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.

The income effect is the response to a change in real income, with relative prices constant.

Demand Function

The relationship between quantity demanded and its determinants can be represented as:

Where:

$Q_d$

quantity demanded of good X

$P_x$

price of good X

$P_y$

price of related goods

$M$

consumer income

$T$

consumer tastes and preferences

$A$

advertising effects

$U$

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.

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