Demand

Demand

The quantity of a good or service consumers are both able and willing to buy at a given price in a particular period of time. it is sometimes referred to as effective demand to distinguish it from the desire to buy something

Law of demand

The quantity demanded for a good or service falls as prices rise, ceteris paribus. This is an inverse relationship

What are the assumptions underlying the law of demand?

• Income effect

• Substitution effect

• Law of diminishing marginal utility

Income effect

As the price of a product falls, consumers real income increases. They are able to buy more product at a lower price. An increase in the price of a good or service reduces peoples disposable incomes.

Substitution effect

As the price of a good or service falls, more customers are able to buy the product, so choose this over rival or substitute products that they might have previously bought. The substitution effect causes consumers to replace high priced products with lower priced ones.

The law of diminishing marginal utility

As individuals consume more of a particular good or service, the satisfaction gained from the additional unit of consumption declines, so customers will only purchase more at lower prices

Market

Any place where transactions take place between a buyer and a seller

Market demand curve

Refers to the sum of all individual demand for a product at each price level

Non-price determinants of demand

• Income

• Tastes and preferences

• Future price expectations

• Price of related goods

• Number of consumers

Normal goods

Products that consumers buy more of when their real incomes rise

Inferior goods

Products that the demand falls when consumers real income rise. For example, used cars

Complementary goods

Products that are jointly demanded. For example, milk and cereal

Substitutes

Products that are competitive in demand because they can be used in place of one another.

Contraction

An increase in price along the demand curve

Expansion

A fall in price along the demand curve

Price

Refers to the amount of money a customer pays in order to purchase a good or service