The Law of Demand
Definition of Demand. FActors of demand. the demand Curve.
Definition of Demand: how willing and able consumers to buy a good or service at a given price level in a given period of time.
To show the level of demand for a good, in economics we use something called the demand curve. It shows us the demand schedules for a good or service. Basically, it tells us how much of a good or service people buy at a given price level. The law of demand states that for a normal good there is an inverse relationship between price and quantity sold. So as the price of something goes up, people buy less of it and vice versa. We will go through the demand curve below, but first we will look at what affects people's demand levels.
The Factors of Demand: the factors of demand are all the things that change the level of demand for a product. Here are some of the factors of demand. They affect how willing and able people are to pay for a product.
Price
Disposable Income
Quality
Population
Advertising
Branding
Fashion/Trends
Price of Substitutes
Price of Complements
Seasons
Speculative Demand
Customer Service
All of the above have effects on people’s demand for a good or service. You can probably work these out logically but we will go through some examples below:
Price: if price of a good goes up then you have to give up more of your income to buy it. It means you face a higher opportunity cost than before. So you buy less of the good, generally speaking.
Disposable Income: if your disposable income increases (be it through an increase in salaried income or even if taxes on your income decrease), then you will have more money available to trade with. In general, you will end up spending more and the market demand for a good service will increase.
Quality: If the quality of a good or service is better, then people are prepared to give up more income for the good or service.
Population: If the population of consumers goes up in a market, then there are more people wanting to buy a good. The demand levels in the market will increase. This is why many businesses like to situate themselves in busy town centres because there are high levels of footfall there.
Speculative Demand: this means if people expect the price of something to change in the future, their demand right now will change. For example, if you expect the price of a new car to increase in the future as it is on sale now, you will probably end up buying it now.
THE DEMAND CURVE
Definition of the Demand Curve: A curve to show the relationship between the price of a good or service and the quantity bought in a static period of time. It shows how willing and able consumers are to buy a good or service.
Let’s capture all this on a diagram:
The diagram above shows us the demand curve. You can see that the price of this product in this market is at £100 at point A. At £100, people buy 1000 units of this product. The demand curve tells us this.
When the price moves to £50, the demand curve shows us that people will buy 2000 units of the product. The above shows a movement in price
The diagram above shows us a shift in demand. This is down to a factor of demand OTHER THAN PRICE. So price changes do not cause the demand curve to shift. Instead it is the other factors of demand that do it.
On the diagram you can see there are two demand curves, D1 and D2. D1 is where we start at £100 and 1000 units of output. There is then a change in the market, an increase in demand for the good being sold. It means that at the price of £100, consumers now wish to buy 2500 units rather than the previous 1000 units.
People want to buy more of this good or service which is good news to the sellers of the good.
So in summary, what I want you to remember is this:
Definition of Demand
The Factors of Demand
Demand Curve Price Movements
Demand Curve Shifts (all factors except from price shift demand)
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