Demand

Demand
See also
Factors affecting demand Price taker Price Change In Supply Monetarism Market mechanisms Substitute goods Bargaining power of buyers Global demand Factors affecting demand and supply

In economics demand is an amount of good which customers are willing to purchase at various prices.

The demand decreases when prices are rising this dependence is known as law of demand. In the reverse situation, where prices decrease the demand increases.

The demand creates a collection of goods and services, which are consumed at specified prices.

Fig. 1. Demand Curve (Begg et al.)

The demand curve is a graph illustrating negative relationship between the price of the good and the quantity demanded for this good when factors are constant.

Types of demand

There are several types of demand, including:

• Individual demand: This refers to the demand for a good or service by a single consumer.
• Market demand: This is the sum of all individual demands for a good or service in a given market.
• Direct demand: This is the demand for a good or service that is used to produce other goods or services.
• Derived demand: This is the demand for a good or service that is a result of the demand for another good or service.
• Normal demand: This is the demand for a good or service that is consistent with the consumer's income and preferences.
• Inelastic demand: This is the demand for a good or service that does not change much in response to changes in price.
• Elastic demand: This is the demand for a good or service that changes significantly in response to changes in price.
• Complementary demand: This is the demand for goods or services that are often used together, such as cars and gasoline.
• Substitute demand: This is the demand for goods or services that can be used in place of another good or service, such as coffee and tea.

Factors affecting the demand

There are some factors which have an impact on the demand curve and its position referring to the goods and services:

• changes in prices of complementary goods and services
• changes in income
• changes in preferences
• changes in expectations
• changes in the number of customers

See more: Factors affecting demand

In economics when demand is equal to supply the market is in equilibrium. The market clearing price define a price which equalizes the quantity demand with the amount of offered goods. The excess demand appears when the quantity needed exceeds the amount of goods which are offered at the specified price.

See also:

• Experience curve

Examples of Demand

• In the market for a certain type of clothing, demand is the amount of that clothing customers are willing to purchase at a given price. For example, if a store offers a shirt for $20, demand will be the number of shirts customers are willing to buy at that price.
• In the market for fuel, demand is the amount of fuel customers are willing to purchase at various prices. For example, if the price of gasoline is $3.50 per gallon, demand will be the amount of gasoline customers are willing to purchase at that price.
• In the market for a certain type of food, demand is the amount of that food customers are willing to purchase at a given price. For example, if a restaurant offers a hamburger for $10, demand will be the number of hamburgers customers are willing to buy at that price.

Advantages of Demand

Demand is an important concept in economics, as it can be used to measure consumer behavior and indicate the market potential for a product. The following are some of the advantages of demand:

• It allows firms to make more informed decisions when setting prices. By understanding the demand for their product, firms can set prices that will maximize their profits.
• It helps firms understand customer preferences. By understanding the demand for a product, firms can tweak their product offering to better meet customer needs.
• It enables firms to anticipate future trends. By studying the demand for their product, firms can forecast future demand and adjust their production accordingly.
• It helps firms understand market saturation. By understanding the demand for their product, firms can measure market saturation and adjust their strategies accordingly.
• It helps governments understand the economic health of their countries. By studying the demand for different products, governments can get an idea of the economic health of their countries and make necessary policy changes.

Limitations of Demand

Demand is the amount of a good that customers are willing to purchase at various prices, but it is subject to a number of limitations. These include:

• Inelasticity of Demand: Demand for certain goods and services may be relatively inelastic, meaning that the quantity demanded is not particularly sensitive to changes in price. For example, some basic necessities such as food and medicine are inelastic, meaning that customers will continue to purchase them regardless of price changes.
• Price Fluctuations: Demand can also be affected by fluctuations in the market, such as when a new competitor enters the market or when an existing competitor significantly lowers their prices.
• Seasonal Factors: Certain products and services may experience seasonal changes in demand, such as winter coats or vacations to warm climates.
• Consumer Preferences: A shift in consumer preferences can also affect demand. For example, if consumers start to prefer a new product over an existing one, the demand for the existing product might decline.
• Income Levels: Demand can also be affected by changes in income levels. When income levels are high, consumers have more disposable income and are more likely to purchase luxury goods, while when income levels are low, consumers are more likely to purchase basic necessities.
• Availability of Substitutes: If there are alternative products or services that can satisfy the same need, then the demand for the original product may be affected.

Other approaches related to Demand

Demand in economics is not only measured by the amount of goods customers are willing to purchase at various prices, but also by several other approaches:

• Price elasticity of demand – this is an economic measure of how sensitive the demand for a good or service is to a change in its price.
• Income elasticity of demand – this is a measure of how sensitive the demand for a good or service is to a change in income of the consumers.
• Cross elasticity of demand – this is a measure of the responsiveness of the demand for a good or service to a change in the price of a substitute or complementary good or service.
• Behavioral economics – this is a field of economics that studies how the psychological, cognitive, emotional, cultural, and social factors affect economic decision making.

In conclusion, demand in economics can be measured not only by the amount of goods customers are willing to purchase at various prices, but also by several other approaches such as price elasticity, income elasticity and cross elasticity of demand, and by behavioral economics.

References

• Begg, D. K. (1982). The rational expectations revolution in macroeconomics: theories and evidence. Johns Hopkins Univ Pr.
• Bryant, R. C. (1989). Macroeconomic policies in an interdependent world. International Monetary Fund.

Author: Anna Klafczyńska