Table of Contents
- What is Demand in Economics
- Law of Demand
- Shifts vs. Movement in Demand Curve
- Giffen Good
- Lesson Summary
In economics, demand refers to the willingness and ability of a consumer to buy goods and services at a specific price. Economists use the term demand to indicate that consumers need particular goods or services and are willing to buy them at the price they are at the time of demand. The relationship between demand and prices of commodities is inversely proportional. When other factors are constant, an increase in prices of goods and services will reduce their demand, and the price decrease of the same commodities will increase the demand.
The supply and demand relationship refers to the number of products companies are willing to produce at certain prices and the quantity of the products consumers wish to purchase at those prices. This relationship is what determines the market prices for the product. Market equilibrium is a state where the prices become stable due to the market's balance between demand and supply.
An aggregate market is an economic model that analyzes aspects like inflation, gross production, and unemployment to understand prices and output. This model also examines the interactions between buyers and sellers to explain issues like inflation and unemployment.
There are many factors that affect demand such as:
The law of demand states that the higher the prices of commodities, the less the demand for the commodities. This law depicts the relationship between prices and demand, where the demand for a product decreases when the price for that product increases. The law of demand works by relating two aspects of the market: price and quantity of demand. This law is vital since it assists the management in determining which prices are desirable in the market by either increasing or decreasing them. A demand schedule presents the number of commodities demanded at various price levels in a table form. This tabulation can be graphed into a continuous demand curve where the Price (P) is plotted against Quantity (Q).
The demand curve represents the relationship between prices and the number of commodities for a specific time in a graph. The demand curve slopes downward for most goods when the prices of these goods are lowered and the demand grows. The primary assumption surrounding a demand curve is that no other vital economic factors change except the prices of the commodities. Other assumptions include clients' preferences remaining the same, and that the income of the consumers does not change. Assume the prices of coffee go up, consumers will buy less coffee and substitute it with another, lesser-priced beverage. As a consequence, the demand for coffee will fall. This situation refers to the law of demand where prices affect demand, and since the prices are high, the demand quantity is reduced. In drawing a graph representing the demand curve of coffee, the prices will be on the y axis while the demand quantity will be on the x-axis. The resulting curve will be a falling curve of the demand quantity of coffee.
There are two main classifications of demand. Elastic demand happens when there is a considerable change in the quantity demand when other factors change, such as the price of coffee in the example above. Inelastic demand refers to a slight or no change in quantity demand when other factors change.
Examples of elastic demand:
Examples of inelastic demand:
Organizations use the law of demand to determine the demand level of their commodities. During the expansion and peak phases, companies can increase the prices of their products since the demand is high. But during the contraction and trough phases, the companies are expected to lower their prices since the demand for their commodities is low.
Fiscal policy measures are steps the government takes to stabilize the economy. They include manipulating the taxes and government spending. These measures are taken so that there is an impact on the aggregate demand. Therefore, when the government influences the cumulative demand, there can be stability in prices in the market, or rather a market equilibrium.
The law of demand states that high prices will result in a lower demand quantity of commodities, while the law of supply dictates that high prices will result in a higher supply quantity. For example, a business will make more of product A if the price of the product increases. If the price of product A decreases, a business would make less of the product.
Shifts change their position in the demand curve while movement happens along the curve. Shifts are caused by other factors not represented in the demand curve graph, while movement is caused by the price and demand quantity present in the demand curve graph axis. When a shift in demand occurs, it implies that consumers will continue to buy more commodities at the same price. On the other hand, a movement occurs where there is a change in the prices of commodities. An increase in demand is indicated by a shift in the demand curve and vice versa. For instance, when the price (P) of corn reduces, the demand (Q) for it increases. That would be represented by the demand curve moving to the right. An increase in price leads to a contraction in demand. Therefore, the result of these fluctuations is a movement in demand either upward, when the demand decreases, or downward when the demand increases, as depicted by the demand curve (D).
Giffen goods are essential commodities that create a higher demand when their prices rise. Therefore, these goods have a different demand law where their prices increase with demand. The name Giffen good was formed after an economist, Sir Robert Giffen. He noted that an increase in the price of basic food increased its demand. Giffen goods are used where there are no substitute commodities, and the good must form a significant portion of total consumption. An example of a Giffen good is bread. This commodity does not depend on the equilibrium of the market. Its price and demand can rise despite the law of demand indicating otherwise.
Demand is an integral and wide area in economics. It is the consumer's willingness and ability to purchase commodities at a low price, which attracts a higher quantity demand of the product. Demand is affected by several factors such as:
There is a law of demand that indicates that price is the inverse of demand. When the price is high, the demand goes down and vice versa. The demand curve slopes downward for most goods when the prices of these goods are lowered and the demand grows. Shifts and movements of the demand curve happen as a result of price and quantity adjustments. The law of supply indicates that businesses tend to produce more when the price is high and vice versa.
Two main classifications of demand are elastic demand, a considerable change in the quantity demanded, and inelastic demand, a slight or no change in quantity demanded.
There are exemptions to the law of demand which are income changes, consumer expectations, or Giffen goods, which defy the law because prices and demand of certain commodities are all high.
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For each of the following, determine the potential impact on the demand curve. Your answer should include why you believe this is the case. Note that it's possible that there may be no impact on the demand curve.
Amanda loves coffee and is willing to go to the same coffee shop every morning to make her purchase. The ability and willingness to buy coffee from a beverage shop at a given price is demand.
Demand can be defined as the ability and willingness of an individual to buy a good or service of their choice at any one given price.
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