Demand
In economics, demand and supply are two very important concepts that help us understand more about how the economic system is operated. Although the economic system is not just consisted of demand and supply, understanding these concepts and the way they work is essential in learning more about economic issues and making good economic decisions. In this blog we will be focusing on demand specifically.
What is meant by Demand?
It refers to the various quantities of a good/service that people will be WILLING and ABLE to purchase at various prices during a period of time. It also pertains to the desire for a certain good or service, and the ability to buy that good or service.
The Law of Demand
The Law of demand states that:
As the price of a product falls, ceteris paribus, the quantity demanded increases; or alternatively, as the price of a product rises, ceteris paribus, the quantity demanded decreases. Example: when the price of gas goes down, the quantity demanded goes up.
The three reasons for the inverse relationship between price and quantity are:
1) Market size effect- a greater number of buyers
2) Income effect- purchasing power or real income increases
3) Substitution effect- some people will switch from other related products to gas. Example: less people will be inclined to take public transit to save on gas money.
The graphical representation of demand is known as the Demand Curve. The demand curve shows the various quantities of a good or service that people will be willing and able to buy at various prices. An example of a demand curve is shown below:
What are the factors affecting quantity demanded?1) Income: If someones income increase they will be more inclined to buy more goods and services than they did before. This is known as an increase of someones purchasing power. The demand for normal goods will increase as the demand for inferior goods will decrease.
2) Prices of related goods: Goods and services are related to one another in two ways: they may be classified as a substitute or a complement. Substitute goods are used to replace each other while complementary goods are used jointly. Example: An increase in the price of Coke will increase the demand for Pepsi because they are substitute goods. An increase in computers being bought would increase the number of anti-virus software programs being bought because they are complementary goods.
3) Tastes and preferences: a change in taste and preference will affect demand. Example: Apple's successful mac vs PC commercials increases the demand for macs due to a consumers change in preference about PCs.
4) Expectations: Expectations of consumers regarding prices in the future will affect present purchases of goods and services. Expectations that consumers have for the prices in the future will affect the present purchases of goods and services. Example: if the prices for gas is expected to increase tomorrow, consumers will purchase more gas today.
5) Population: The quantity of a product being purchased depends on the number of buyers in the market. Example: an increase in the number of tourists visiting Toronto would increase the demand for hotels and other services in the city.
There is almost no other product being in higher demand these days than oil. Here is a video explaining how oil deals with Demand.
