Demand

Understanding Demand

• Demand is the quantity of a product or service that consumers are willing and able to buy at a given price at a specific time.
• At higher prices, consumers usually demand less of a product (holding other things constant), a concept known as the law of demand.
• In a demand curve, the quantity demanded is on the x-axis and price on the y-axis. The curve is usually downward sloping, reflecting the law of demand.

Factors Affecting Demand

• Price of the product: Changes in price can significantly influence demand. As the price rises, demand usually falls - and vice versa.
• Income: If consumers’ income increases, they are likely to buy more of a product, assuming it isn’t an inferior good (a good less in demand as income rises.)
• Taste or preference: Changes in consumers’ preferences can greatly influence demand. Fads or trends can spike or decrease demand.
• Substitutes: Price changes for a substitute good-influence demand. For example, if the price of beef increases, consumers might buy more chicken.
• Complements: Complementary goods are typically used together. If a complementary good’s price increases, the main product’s demand might drop.
• Population and demographics: More people means more demand. Changes in demographics (e.g., more young people) can affect demand differently.

Effects of Changes in Demand

• If demand increases without a change in supply, prices are likely to rise, and more goods will be sold. This results in a shift to the right of the demand curve.
• If demand decreases without a change in supply, prices are likely to fall, and fewer goods will be sold. This results in a shift to the left of the demand curve.

The Concept of Elasticity

• Price elasticity of demand (PED) measures the responsiveness of quantity demanded to a change in price.
• Goods with a high PED (absolute value >1) are said to be elastic: if the price changes by a certain percentage, the quantity demanded will change by a larger percentage.
• Goods with low PED (absolute value <1) are said to be inelastic: if the price changes by a certain percentage, the quantity demanded will change by a smaller percentage.
• Key determinants of PED include availability of substitutes, degree of necessity, and proportion of income spent on the good.

Recognise that demand is a fundamental concept in economics and forms one of the critical forces in a market. Understanding it allows you to predict how changes in price or other factors may impact the quantity of a good or service that consumers want to buy.