Understanding Demand in Economics

Meaning of Demand

• Demand refers to the quantity of a good or service that buyers are willing and able to purchase.
• Demand necessitates more than just a desire to own something in economics.
• Effective demand depends on desire, means to purchase, and willingness to spend.
• Solely effective demand would appear in business decisions and economic analysis.
• Quantity demanded is expressed at a given price, quantities vary at different prices.
• Quantity demanded is a flow that expresses demand as 'so much per period of time' rather than one isolated purchase.
• Demand refers to the quantities of a commodity or service consumers buy in a market over a period of time, at various prices, incomes or prices of related goods.

Determinants of Demand

• Knowledge of common determinants of demand and their relationships is important for businesses to estimate market demand.
• There are a number of factors to consider
• Not all factors to consider are equally important, some cannot be measured or quantified easily.

Price of the commodity

• The good's own price is a key determinant of its demand, ceteris paribus.
• Demand is inversely related to price: a rise in price causes a fall in quantity purchased, and vice versa, because of income and substitution effects.

Price of related commodities

• Related commodities are complementary goods or competing goods/substitutes.
• Complementary goods/services are bought/consumed together or simultaneously
  • Examples include tea and sugar, automobiles and petrol, pens and ink etc
• Increase in demand for one complement corresponds to increased demand for the other.
• A fall in the price of one complement increases demand for the other, the opposite occurs when the price of a complement rises.
• Competing goods/substitutes satisfy the same want and can be used in place of one another
  • Examples include coffee and tea or ball pens and ink pens
• When goods are substitutes, buyers may switch to a cheaper substitute if the price of a product goes up which decreases the demand for product as a result
• A fall in the price of a product leads to a fall in the quantity demanded of its substitutes, conversely if the price of tea falls, there maybe a substitute it for coffee

Disposable Income of the Consumer

• A buyer's purchasing power is determined by their disposable income.
• A higher disposable income generally increases demand for certain goods/services at the given price.

Normal Goods

• Normal goods are those demanded in increasingly quantities as consumers income increases
• Households furniture, clothing, automobiles, consumer durables and semi-durables etc are examples
• Demand for normal goods falls when income reduces.

Inferior Goods

• These increase in quantity to a certain level but decrease where there's an increase in money beyond that level.
• Necessities are satisfied by consumer goods like food grains, fuel, clothing etc.
• As people become richer, the importance of food and other non-durable goods decreases, while durable goods such as TVs, cars, and houses increase.
• Luxury and prestige goods' demand rises beyond a certain level of consumers' income. Business managers must understand the nature of their products and the relationship of quantities demanded with buyers' incomes.
• Recognizing movements in macroeconomic variables affecting buyers’ incomes is needed to assess current and future product demand.

Tastes and preferences of buyers

• Demand is affected by preferences that change over time, with more fashionable goods commanding higher demand.
• Consumers may discard products as obsolete even if they still function
• Demonstration effect refers to emulating others' consumption, people buy things because others have them.

Bandwagon effect

• Bandwagon effect refers to increased demand due to others consuming the same product
• The term signifies the desire of purchasing a commodity in order to be fashionable or stylish

Snob effect

• Snob effect refers to decreased demand because others consume the same commodity
• This effect represents the desire to be exclusive and dissociate from the "common crowd"
• Some people will reduce consumption or stop altogether when a product becomes too common

Veblen Effect

• Highly priced goods are consumed by status seeking people to satisfy their need for conspicuous consumption
• Unlike the snob effect, this is a function of price rather than the consumption of others

Consumers' Expectations

• Expectations regarding future prices and income influence current demand
• Higher expected future prices/shortages increase current demand whereas, expectations of lower prices lead to postponed purchases

Other factors

• Population size: Larger populations have higher demand
• Age distribution: Demand varies with the proportion of different age groups
• National income distribution: High national income with equal distribution raises demand for products
• Consumer credit: Availability of credit increases purchases
• Government policies: Can influence demand through taxation, expenditure, and subsidy policies
• Weather, business conditions, education levels, and advertisement also affect overall demand.

The Demand Function

• A function illustrates relationship between dependent and independent variables
• A demand relationship is expressed via equation between product demand (dependent variable) and determinants like price (independent/explanatory variables)
• Any other factors that are not listed are assumed to be irrelevant or held constant.

Law of Demand

• A price increase of a good leads to a fall of the quantity demanded
• Inverse relationship exists between price and quantity demanded
• Factors held constant for the law of demand involves prices of related commodities, consumer income, and tastes must be constant.
• The amount of a service that consumers will buy at a given price, holding other factors constant.
• Law illustrated by use of a demand schedule and demand curve. Demand is the amount of a service buyers are willing to purchase, all other influences being held constant .

The Demand Schedule

• Presents a table of quantities of a good or service buyers choice to purchase at different price points over a particular time
• A demand schedule illustrates the prices and quantities of a good that a buyer would purchase.
• Created with assumption that other factors are unchanged to isolate the effect of good on amount sold

The Demand Curve

• A demand curve graphically represents the demand schedule
• Vertical axis measures price per unit, and the horizontal axis measures the quantity of the good vs price per unit
• Each data pair is plotted on a graph and the resulting points are joined to create a chart that can show the relationship between demand and price

Market Demand Schedule

• Demonstrates alternative amounts of a commodity demanded per time period, at various alternative prices, by all buyers in the market
• The total quantity that all buyers are willing to buy per unit of time at a given price, "other things" like individual and number

Market Demand Curve

• Illustrates the quantities of a good demanded by all buyers in a market
• Achieved through the summation of all individual demand curves (horizontal)

Rationale of the Law of Demand

• Demand curves usually decline downward
• Consumers normally buy more at a lower price
• Different explanations for the operations of the law are available

Price Effect of a Fall in Price

• Substitution or income impacts describes hoe consumer's purchases changes where there is a price effect
  • When the price of a commodity falls, the comparison between items change, and it becomes inexpensive when assuming other commodities are constant.
  • The consumer will start changing towards the commodity whose price has fallen

Income Effect

• The rise results from a rise in real income is known and can lead ot and can result in more can be of the results to and this commodity falls
• The increase also rises, a part of it and falls with the price falling

Consumption with Income Effect

• A consumer's satisfaction with their price can be maximized according to consumer and willing be low. The utility and act also decreases curve slope

Arrivals of new Consumers

• If a commodity decreases, the more consumer will not have enough to effort, this also rises their need for questions

Different Uses

• If prices also rises, it will only have limited uses and will then get commodities

Exceptions to the Law of Demand

• Normally, more demand happens at lower prices given similar conditions
• There are times when this doesn't happen

Conspicuous goods

• Prestige items are status symbols used by the rich
• These items become more attractive if the prices go up
• People measure a commoditiy by its price (higher equal more utility)
• Veblen effect applies where is there the higher the price, is the value demand

Giffen goods

• As the price of bread increased it still purchased by workers and not less due to low cost and high value
• Goods like this like wheat with no close substitutes, are called 'Giffen Goods'

Conspicuous necessities

• Continuous usage for tvs, air conditions, and refrigerators, their value does not show a fall.

Future Expectations About Prices

• People expect higher prices and buy more

Expansion and Contraction of Demand

• Fall in price leads to a raise of quantity demanded
• Demand is impacted by changes in the price while other determinants stay constant.

Increase and Decrease in Demand

• Expansion/contraction results from prices changes when other determinants remain constant.

Shifts in the Demand Curve

• Demand is impacted by changes in the price while other determinants stay constant. A shift means there's change
• This is associated to income, taste and preferences of a product

Movements Along the Demand Curve vs. Shift of Demand Curve

• Movement along the demand varies based on change
• When there's an increase or decrease, it refers to curve because one or more of assumed
• Shifts represent changes, because of changes

Elasticity of Demand

• Responsiveness of demand change and how responsive is to a determinate'

3 Examples

• headphones price fall and quality sold
• price of wheat sold raised and amount demanded
• salt has a constant demand despite the price

Price Elasticity of Demand

• the sensitivity of quantity demanded to 'own price' or the price of the good itself
• helps firms predict impact of price change and profit
• % in is the the percentage, and percentage
• original

Point Elasticity

• Point elasticity occurs at a the derivative of quantities

Arc Elasticity

• Occurs where to or more points and used where point