Topic 6: Demand

1. Meaning

Demand is the quantity of a good or service that consumers are willing and able to buy at a given price in a given period of time.

Effective demand: the desire to buy backed by purchasing power.

2. Law of Demand

Other factors remaining constant, the quantity demanded of a good falls as its price rises, and rises as its price falls.

Demand Schedule (Example)

The demand curve slopes downward from left to right.

Why the Curve Slopes Downward

1. Income effect: lower prices increase real income.
2. Substitution effect: cheaper goods replace costlier ones.
3. Law of diminishing marginal utility.
4. New buyers enter the market at lower prices.

3. Determinants of Demand (Shift Factors)

1. Price of related goods: substitutes (tea/coffee) and complements (car/petrol).
2. Income: higher income increases demand for normal goods.
3. Tastes and fashion.
4. Population size and structure.
5. Expectations of future prices or income.
6. Advertising and promotion.
7. Weather and seasons.

4. Movement vs Shift of the Demand Curve

• Increase in demand: shifts right. Decrease in demand: shifts left.

5. Exceptions to the Law of Demand

1. Giffen goods: inferior staples where demand rises with price.
2. Prestige (Veblen) goods: luxury items bought because they are costly.
3. Necessities (e.g. salt): price changes have little effect.
4. Expectation of further price rise.
5. Ignorance about price or quality.

6. Types of Demand

• Individual and market demand
• Joint (complementary) demand
• Competitive demand
• Derived demand
• Composite demand