Demand

Section 1: Understanding Demand

  • Demand is defined as the quantity of a good or service that consumers are willing and able to purchase at a given price in a given time period.
  • The law of demand suggests that there is an inverse or negative relationship between the price of a product and the quantity demanded. When the price rises, demand falls, and vice versa.
  • It’s important to remember that demand is not the same as desire or need. A person may need or want a product, but if they can’t afford it, there’s no demand.

Section 2: Factors Influencing Demand

  • Price of the product naturally affects its demand. The higher the price, the less is the demand, keeping other factors constant.
  • Consumer income is also a significant factor. As income rises, so does the demand for products, especially for normal goods and luxury goods.
  • Trends and tastes also influence demand. Successful marketing or changing societal trends can boost the demand for a product.
  • Prices of related goods can also have a strong effect. If the price of a good that can be used as a substitute for another good rises, the demand for the latter good increases.

Section 3: Movement vs Shift in Demand

  • A movement along the demand curve, also known as a change in quantity demanded, occurs when the price of the product changes, ceteris paribus (all else being equal).
  • A shift in the demand curve takes place when any non-price determinant of demand changes, such as consumer income, tastes, or the prices of related goods.

Section 4: Elasticity of Demand

  • The price elasticity of demand (PED) measures the responsiveness of quantity demanded to a change in price. It’s calculated as the percentage change in quantity demanded divided by the percentage change in price.
  • Goods with close substitutes will have a more elastic demand. When the price increases, consumers can easily switch to the substitutes.
  • Necessity goods and goods with fewer substitutes tend to have a more inelastic demand. Demand does not change significantly with price changes in this case.