In economics, demand refers to the quantity of a good or service that consumers are willing and able to buy at various prices during a particular period of time. It represents the relationship between the price of a product and the quantity of that product that consumers are willing to purchase. The law of demand, a fundamental principle in economics, states that, all else being equal, as the price of a good or service decreases, the quantity demanded increases, and vice versa.
The law of demand is a fundamental principle in economics that describes the relationship between the price of a good or service and the quantity demanded by consumers. The law of demand can be summarized with the following statement:
The law of demand states that the quantity purchased varies inversely with price. In other words, the higher the price, the lower the quantity demanded.
A demand function is a mathematical function describing the relationship between a variable, like the demand of quantity, and various factors determining the demand. The purpose of this function is to analyze the behavior of consumers in a market and to help firms make pricing decisions.
Well explained article: https://sites.google.com/site/economicsbasics/demand-function
The demand curve is downward-sloping due to the law of demand, which states that, all else being equal, as the price of a good or service decreases, the quantity demanded for that good or service increases, and as the price increases, the quantity demanded decreases.
There are a few reasons why this negative relationship between price and quantity demanded exists:
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Substitution Effect: When the price of a good decreases, it becomes relatively less expensive compared to other goods. Consumers often respond to this by substituting the now relatively cheaper good for other goods, leading to an increase in the quantity demanded.
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Income Effect: A decrease in the price of a good effectively increases consumers' real income, allowing them to purchase more of the good with the same amount of money. Conversely, an increase in price reduces real income, leading to a decrease in the quantity demanded.
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Diminishing Marginal Utility: The law of diminishing marginal utility suggests that as consumers consume more units of a good, the additional satisfaction or utility derived from each additional unit diminishes. Therefore, consumers are willing to pay a higher price for the first unit (which provides the highest level of satisfaction) and less for subsequent units.
Graphically, when you plot these relationships on a demand curve, you observe a negative slope. The downward-sloping demand curve is a fundamental concept in microeconomics and is crucial for understanding consumer behavior and market dynamics. It serves as a foundational principle in the analysis of supply and demand in a market economy.
There are many determinants of demand, but the top five determinants of demand are as follows:
Product cost: Demand of the product changes as per the change in the price of the commodity. People deciding to buy a product remain constant only if all the factors related to it remain unchanged.
The income of the consumers: When the income increases, the number of goods demanded also increases. Likewise, if the income decreases, the demand also decreases.
Costs of related goods and services: For a complimentary product, an increase in the cost of one commodity will decrease the demand for a complimentary product. Example: An increase in the rate of bread will decrease the demand for butter. Similarly, an increase in the rate of one commodity will generate the demand for a substitute product to increase. Example: Increase in the cost of tea will raise the demand for coffee and therefore, decrease the demand for tea.
Consumer expectation: High expectation of income or expectation in the increase in price of a good also leads to an increase in demand. Similarly, low expectation of income or low pricing of goods will decrease the demand.
Buyers in the market: If the number of buyers for a commodity are more or less, then there will be a shift in demand.
Helpful article: https://byjus.com/commerce/demand/
Movement along the demand curve refers to a change in the quantity demanded of a good or service as its price changes, while all other factors affecting demand remain constant. This is represented by a movement along the demand curve itself, as shown in the following graph:
In this graph, the demand curve shows the relationship between the price of a good (P) and the quantity demanded (Q). As the price of the good increases, the quantity demanded decreases, and vice versa. This inverse relationship is represented by the downward slope of the demand curve.
Movement along the demand curve can occur for a variety of reasons, such as:
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Changes in consumer income: If consumers' incomes increase, they will generally be willing to buy more of a good at any given price. This will cause the demand curve to shift to the right.
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Changes in consumer tastes and preferences: If consumers' tastes and preferences change, this can also cause the demand curve to shift. For example, if consumers become more health-conscious, they may demand less of a good that is perceived as unhealthy.
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Changes in the prices of substitutes: If the prices of substitutes change, this can also cause the demand curve for a good to shift. For example, if the price of butter increases, the demand for margarine may increase.
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Changes in expectations: If consumers expect the price of a good to increase in the future, they may be more likely to buy the good today. This will cause the demand curve to shift to the right.
A shift in the demand curve occurs when there is a change in the quantity demanded at every given price, due to a change in one or more factors other than the price of the good. For example, if consumers' incomes increase, this will cause the demand curve to shift to the right.
As you can see in the graph, the demand curve has shifted to the right. This means that at every given price, consumers are now willing to buy more of the good.
Here are some of the factors that can cause a shift in the demand curve:
- Changes in consumer income
- Changes in consumer tastes and preferences
- Changes in the prices of substitutes
- Changes in the prices of complements
- Changes in expectations
- Changes in population size
- Changes in technology
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Several factors can cause a shift in the demand curve, reflecting changes in the overall quantity demanded at each price level. These factors include:
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Income: Changes in consumer income can significantly impact the demand for goods and services. For normal goods, an increase in income tends to lead to an increase in demand, shifting the demand curve to the right. For inferior goods, the relationship may be the opposite.
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Price of Related Goods:
- Substitutes: The demand for a good may increase if the price of its substitute rises. For example, if the price of coffee increases, the demand for tea (a substitute) may increase, shifting the demand curve for tea to the right.
- Complements: The demand for a good may decrease if the price of its complement rises. For instance, if the price of smartphones (complement) increases, the demand for smartphone cases may decrease, shifting the demand curve for cases to the left.
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Consumer Preferences and Tastes: Changes in consumer preferences and tastes can lead to shifts in the demand curve. For example, if a new study highlights health benefits of a certain fruit, the demand for that fruit may increase, shifting the demand curve to the right.
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Expectations: Consumer expectations about future prices, income, or economic conditions can influence current demand. If consumers expect prices to rise in the future, they may increase their current demand, shifting the demand curve to the right.
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Population Changes: Changes in the size or demographics of the population can affect overall demand. For instance, an increase in the population may lead to an increase in the demand for various goods and services.
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Government Policies: Government policies, such as taxes, subsidies, or regulations, can impact the demand for certain goods. For example, a subsidy on electric vehicles might increase their demand, shifting the demand curve to the right.
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Advertising and Marketing: Effective advertising and marketing campaigns can influence consumer preferences and increase demand for a product, shifting the demand curve to the right.
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Seasonal Factors: Seasonal changes or holidays can affect the demand for specific goods. For instance, the demand for winter clothing may increase during the colder months, shifting the demand curve to the right during that period.
It's important to note that these factors can work in combination, and the overall impact on the demand curve depends on the specific circumstances of the market and the nature of the goods or services in question.
Elasticity of Demand: https://youtu.be/HHcblIxiAAk?si=Rcu0IKRhdNf1HRIK Understand Elasticity: https://youtu.be/1XXhpHJTglg?si=WjzA46uIaTqkBEzP
Elasticity of demand is a concept in economics that measures how sensitive the quantity demanded of a good or service is to a change in its price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price. The formula for elasticity of demand (Ed) is:
- Price elasticity of demand is a measurement of the change in consumption of a product in relation to a change in its price.
- A good is perfectly elastic if the price elasticity is infinite (if demand changes substantially even with minimal price change).
- If price elasticity is greater than 1, the good is elastic; if less than 1, it is inelastic.
- If a good’s price elasticity is 0 (no amount of price change produces a change in demand), it is perfectly inelastic.
- If price elasticity is exactly 1 (price change leads to an equal percentage change in demand), it is known as unitary elasticity.
- The availability of a substitute for a product affects its elasticity. If there are no good substitutes and the product is necessary, demand won’t change when the price goes up, making it inelastic.
- Availability of substitutes: If close substitutes are available, demand tends to be more elastic.
- Necessity vs. Luxury: Necessities often have inelastic demand, while luxury items may have elastic demand.
- Time horizon: Demand elasticity may change over time. In the short run, demand may be more inelastic, but in the long run, consumers may find alternatives, making demand more elastic.
- Definition of the market: The broader the definition of the market, the more substitutes are likely to be available, and demand may be more elastic.
Understanding elasticity of demand is crucial for businesses and policymakers. It helps in pricing strategies, tax policy decisions, and predicting the impact of price changes on total revenue.
Elasticity of demand is not constant along a linear demand curve. Instead, it varies at different points along the curve. The reason for this variability is that the percentage change in quantity demanded in response to a percentage change in price can differ depending on the initial price and quantity.
Here's a more detailed explanation:
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Elasticity Changes Along the Demand Curve:
- Near the top of a linear demand curve (where quantity is small), demand tends to be elastic because consumers can easily find substitutes, and small price changes have a significant impact on quantity demanded.
- In the middle of the demand curve, elasticity is moderate.
- Near the bottom of the demand curve (where quantity is large), demand tends to be inelastic because consumers have fewer substitutes, and price changes have a relatively small impact on quantity demanded.
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Calculating Elasticity Along the Demand Curve:
- To calculate elasticity at a specific point on a demand curve, you would use the formula I mentioned earlier:
- The percentage change in quantity demanded and price is calculated based on the initial and final values at the specific point on the curve.
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Graphical Representation:
- On a linear demand curve, you can visually observe changes in elasticity. Steeper portions of the curve correspond to less elastic (or more inelastic) demand, while flatter portions indicate more elastic demand.
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Total Revenue and Elasticity:
- Understanding elasticity along the demand curve is crucial for businesses. In general, when demand is elastic (Ed > 1), a decrease in price increases total revenue, while an increase in price decreases total revenue. Conversely, when demand is inelastic (Ed < 1), a decrease in price decreases total revenue, while an increase in price increases total revenue.
In summary, the elasticity of demand varies along a linear demand curve, and businesses need to consider this variability when making pricing and production decisions.
Perfectly elastic demand means when the percentage of change in quantity demanded is infinite even if the percentage of change in price is zero, the demand is said to be perfectly elastic. Increasing of demand at given price. According to law of demand, the demand for goods and services changes when there is change in its price. But the relationship between demand and price may not be the equal and same in all the case, it may vary from product to product or time to time or market to conditions. So as to understand extent of the effect of price on the demand, one should know about the price elasticity of demand concepts.
PERFECTLY ELASTIC DEMAND: https://sites.google.com/site/economicsbasics/perfectly-elastic-demand
Draw a demand curve from a demand schedule: https://youtu.be/2ElmDWnCA3s?si=BNNQkCne8_fT0Zsa
How to Draw the DEMAND CURVE (Using the DEMAND EQUATION): https://youtu.be/Oa59CLYFfCo?si=M51wmltK3Na-1H6O