The concept of demand
Demand refers to the quantity of a good or service that consumers are willing and able to buy at various prices over a period of time. The law of demand states that, ceteris paribus, there is an inverse relationship between price and quantity demanded: as the price of a good falls, quantity demanded rises; as the price rises, quantity demanded falls. This negative relationship is represented by a downward-sloping demand curve.
Determinants of demand
Factors other than price that influence demand include:
- Income – higher income generally increases demand for normal goods, while demand for inferior goods may fall.
- Tastes and preferences – advertising, fashion and changes in consumer preferences affect demand.
- Prices of related goods – an increase in the price of a substitute raises demand for the good, whereas an increase in the price of a complement reduces demand.
- Population – a larger population increases market demand.
- Expectations – expectations about future prices or income may change current demand.
Movements along the demand curve
Movements along the demand curve are caused only by a change in the price of the good itself. A fall in price increases quantity demanded, while a rise in price reduces quantity demanded.
The market demand curve
The market demand curve is the aggregation of all individual demand for a product at each price level. It is found by adding together the quantities demanded by different groups of consumers for each possible price, giving the total quantity demanded in the market.
Shifts in the demand curve
While movements in demand are caused by price changes, shifts in the demand curve occur when non-price factors change. An increase in demand, represented by a rightward shift of the curve, means a higher quantity is demanded at every price. This can result from higher disposable income, positive changes in tastes and preferences, higher prices of substitutes, lower prices of complements or successful advertising campaigns. By contrast, a decrease in demand, shown by a leftward shift, occurs when less is demanded at every price — often due to falling incomes, higher unemployment or a fall in the price of substitutes.
Important distinction
A movement along the demand curve is caused by a price change. A shift of the demand curve is caused by a non-price factor.
