Demand

What is Demand?

• Demand is the quantity of goods or services that consumers are willing and able to buy at any price level at a specific period in time.
• The quantity that consumers are able to purchase at any price level is called effective demand.
  

The Law of Demand

• "As the price of the products falls, the quantity demanded of product will usually increase of ceteris paribus"
• Ceteris paribus means all other factors and variables are kept equal, this means that there aren't any other factors affecting demand.

• This means that quantity and price are inversely proportional.
• As price goes up, demand goes down and as price goes down, demand goes up.
  

Demand Graphs

• In a graph that shows demand, demand is drawn as the x-axis and price is drawn as the y-axis.
• The demand curve in a graph is usually a parabolic curve that slopes downward.
• However, for simplicity the demand curve is generally drawn as a straight line sloping downward.

• Quantity demanded is represented by a point on the demand curve.
• Change in price leads to movement of the point along the curve.

• If any other factors change that affect demand, the entire curve shifts.
• If the change leads to increased demand the curve moves to the right.
• If the change leads to decreased demand the curve moves to the left.

Non-Price Determinants of Demand

• While price is the main determinant of demand, there are 5 additional phenomena that affect the demand of a good or service.

Income

• Demand increases whn disposable income increases.
• This means people have more money to spend.
• With more disposable income, the demand curve shifts to the right, as people can buy more with the same price, increasing demand.

Normal Goods

• Most economic goods are normal goods, meaning that their demand increases as income, and thus purchasing power increases.

Inferior Goods

• Some economic goods or services are inferior goods, the opposite of normal goods.
• As people's income increases, the demand for inferior goods decreases.
• Inferior goods are usually cheap but necessary goods

Example

• Potatoes are inferior goods.
• If your income increases you won't buy more potatoes, as you can only eat so many.
• Instead you will likely prefer to buy fancier foods, such as pasta or steaks.

Income Effect

• As prices fall, "real income" (the amount that the consumer's income is worth) increases.
• If the price goes down for a product, the purchasing power increases for consumers, allowing them to purchase more with the same money.

The Price of Other Products

• The price of relevant products can affect the demand for a good or service.
• Price changes in alternative products or complementary goods generally affect demand.

• Related or alternative goods compete with each other, as people who buy one of the goods generally don't need the other.
• If there is an increase in demand for one of the products, there is a decrease in demand for the other; and vice versa.

• Complementary goods work together, meaning that if people buy one of the goods, they also need the other one to get utility out of the good.
• If demand for one good goes up, then the demand for the other good goes up as well; and vice versa.

Examples

• The price of a substitute or competitor's good increases, leading to decreased demand for their products, and more for your product.

• Or the price of a complementary good decreases, increasing demand for your product, and therefore for your product as well.
• If the demand for CD players increases, then the demand for CDs will also increase.

Substitution Effect

• As prices fall, the product becomes more attractive compared to other products whose price remains unchanged.
• Therefore, consumers will purchase more of the cheaper product by substituting it for the more expensive product.

Tastes and Preferences

• Economist don't usually take personal tastes into account.
• However marketing, campaigns, hype, rumors and trends can all affect demand.
• Negative preferences or stigmas reduce demand and vice versa.
• For example Coca Cola is known to be unhealthy and very artificial, which is why some people prefer other drinks instead.

Number of Consumers

• If there is an increase in the number of consumers of a product, then there will be a shift of the demand curve to the right, therefore increased demand.
• This often relates to the size of the population or a demographic in a country.

Future Expectations

• Expectations about the future can also affect the demand for goods and services.
• Generally depends on marketing and the economic situation.

Future Price

• If people expect prices of goods and services to increase in the near future they may decide to purchase more of the good now.

Future Economy

• If consumers expect the economy to do well, meaning consumers expect to keep their jobs and increase their incomes in the near future, they may increase their consumption of goods and services.
• The same applies vice versa, where demand might decrease if people expect increased prices or less reliable income or possible unemployment.
  

Other Factors that Affect Demand

• Changes in age structure (affects needs and wants of the population).
• Changes in income distribution (affects purchasing power).
• Wars or crises (reduces purchasing power).
• Government policy changes.
• Seasonal changes (affects demand of specific products).

The Law of Diminishing Demand

• The principle is that as additional units of a good or service are consumed, the marginal utility will decline.
• This means that the more consumers buy of any good the less satisfaction and utility they get from each new unit consumed.
• When consumers receive little additional satisfaction/utility, they stop buying.
• Marginal utility reduces demand.

• As marginal utility decreases, the total utility slope begins to reduce.
• When marginal utility reaches a negative value, total utility begins to go down.

Sources

https://enotesworld.com/total-utility-marginal-utility-and-their-relationship/