Demand and the Law of Demand

Questions About Demand and the Law of Demand

• What factors influence consumer demand for a product?
• How does the law of demand explain the relationship between price and quantity demanded?
• What is the difference between a change in demand and a change in quantity demanded?
• How do shifts in demand affect equilibrium price and quantity in a market?
• What are the exceptions to the law of demand?

Understanding Demand

• Demand refers to the consumer's desire and ability to purchase a good or service at various price points during a specific period.
• It's not just a want, but a willingness to pay and have the means to do so.
• Demand is influenced by numerous factors beyond the price itself.

The Law of Demand

• The law of demand states that there is an inverse relationship between the price of a good or service and the quantity demanded.
• As the price of a good rises, the quantity demanded falls, ceteris paribus (all other factors remaining constant).
• This inverse relationship is primarily due to consumer's purchasing power and the substitution effect.
• The substitution effect means that consumers are more likely to substitute a more expensive good with a cheaper alternative.
• Higher prices reduce the affordability of the good.

Factors that Influence Demand (Other than Price)

• Price of related goods:
  • Substitute goods are goods that satisfy a similar need (e.g., Coke and Pepsi).
  • Complementary goods are goods that are used together (e.g., cars and gasoline).
• Consumer income: Higher income generally leads to higher demand for normal goods but potentially lower demand for inferior goods.
• Consumer tastes and preferences: Changes in fashion, trends, or consumer preferences shift demand curves.
• Consumer expectations: Expectations about future prices or income influence current demand.
• Number of buyers in the market: An increase in the number of consumers often leads to a higher market demand.
• Seasonality: Demand for certain goods and services is affected by seasonal changes (e.g., summer clothing, winter fuel).

Changes in Demand vs. Changes in Quantity Demanded

• A change in demand occurs when a factor other than the good's price influences the quantity demanded at every price. This results in a shift of the entire demand curve.
• A change in quantity demanded occurs when the price of the good changes, resulting in movement along the same demand curve.

Demand Curves

• A demand curve is a graph that visually represents the relationship between price and quantity demanded.
• The curve typically slopes downward from left to right, illustrating the inverse relationship outlined by the law of demand.
• The demand curve shifts in response to changes in non-price factors.

Exceptions to the Law of Demand

• While the law of demand generally holds, there are exceptions in specific situations. These arise where the demand curve might slope upwards.
• Giffen goods are inferior goods for which the quantity demanded increases as the price increases. This unusual effect is often due to the fact these goods are a significant portion of a consumer's budget and become relatively more attractive when their price increases compared to substitute items.
• Veblen goods are luxury items, where higher prices are associated with higher demand due to perceived exclusivity or prestige.

Summary

• Demand is a consumer's willingness and ability to purchase a good or service.
• The law of demand describes the inverse relationship between price and quantity demanded.
• Several factors beyond price, such as income, preferences, and expectations, influence demand.
• Shifts of the entire demand curve represent changes in demand.
• Movements along the curve represent changes in quantity demanded.
• Exceptions to the law of demand exist but often represent specific circumstances.