Demand Analysis in Economics

Demand Analysis

• Demand is the desire backed by the willingness and ability to pay for a commodity.
• Utility is the basis of demand, desire or need to have a commodity.
• Demand schedule is a table showing the relationship between price and quantity demanded.
• Individual demand schedule shows the quantity of a commodity a consumer is willing to buy at various prices.
• Market demand schedule shows the total quantity of a good demanded by all consumers at different prices.
• Individual demand curve graphically represents the relationship between price and quantity demanded by an individual.
• Market demand curve is a horizontal summation of individual demand curves.
• The demand curve slopes downward, illustrating an inverse relationship between price and quantity demanded.

Meaning of Demand

• Demand in everyday language refers to a desire.
• In economics, demand is a desire backed by the willingness and ability to pay.
• Demand is an effective desire; all desires are not demands.
• Demand must have all three elements: desire; ability to pay; willingness to purchase.

Determinants of Demand

• Price: Higher price, lower quantity demanded; lower price, higher quantity demanded.
• Income: Higher income leads to higher demand for normal goods; lower income leads to lower demand for normal goods.
• Prices of related goods (substitutes and complements): Substitute goods (e.g., coffee and tea); the price of one good affects the demand for the other. Complement goods (e.g., car and fuel).
• Tastes and preferences: Consumer preferences influence demand.
• Consumer expectations: Expected price changes affect current demand (e.g., expecting a price rise will lead to more purchases now).
• Size of population and consumer composition: Population size is a key factor.
• Advertising and marketing: Marketing efforts influence demand.
• Government policies: Government policies impact the demand for certain goods.
• Fashion, habits, tastes: Consumer preferences, including fashion trends or habits influence demand.

Exceptions to the Law of Demand

• Giffen goods: Inferior goods for which demand increases as price increases (e.g., inferior staple foods).
• Prestige goods: Luxury goods for which demand increases as the price increases (e.g., luxury cars).
• Speculation: Goods that are expected to increase in price will see increased demand.
• Price illusion: Consumers assume higher-priced goods are of better quality.
• Ignorance of substitute prices: Consumers may not be aware of the lower price of substitute products.
• Habit and custom: Demand for certain goods persists due to habit and custom, despite price increases (e.g., nicotine).

Types of Demand

• Direct demand: Refers to consumer goods (directly purchased)
• Indirect demand: Refers to intermediate or producer goods (needed for further production).
• Joint demand: The simultaneous demand for two or more goods, used together (e.g., fuel and car).
• Composite demand: Demand for a good with multiple uses (e.g., electricity).
• Competitive demand: Demand for goods that can be substituted (e.g., tea and coffee).

Expansion and Contraction of Demand

• Expansion of demand: An increase in the quantity demanded due to a fall in price of the good (holding all other factors constant). It moves along the demand curve.
• Contraction of demand: A decrease in the quantity demanded due to an increase in the price of the good (holding all other factors constant). It moves along the demand curve.

Increase and Decrease in Demand

• Increase in demand: An upward shift of the demand curve due to factors other than the good's own price (e.g., taste, income).
• Decrease in demand: A downward shift of the demand curve due to factors other than the good's own price (e.g., tastes, income).

Market Demand Analysis

• Market demand refers to the total demand for a commodity at a given price point during a particular period.
• The market demand schedule specifies the total quantity demanded at various prices.
• Market demand curve is derived by summing the demand curves of all individual consumers at each price.

This quiz explores the fundamental concepts of demand in economics, including demand schedules, curves, and utility. Understand the relationship between price and quantity demanded through individual and market demand perspectives. Test your knowledge on how demand influences market behavior.