Demand

3 May

First of all you all should know what the definition of market is. So how we can describe more accurately this economic term? Market is an economic institution where buyers and sellers meet each other, and create different economic transactions, which imply buying a good or receiving a service.

First of all we should know that demand is a curve that shows buyers’ willingness and ability to get a good or a service at different prices, ceteris paribus. Willingness alone is not enough to make your desires to become real, because every good or service has a price, which you should be able to pay in order to get that good or service.  It is important to mention “other things equal” factor here, because demand for one good can be changed if the price of complementary good was changed. Here we should introduce one very famous and very obvious rule of economics, called law of demand. It states that, other things equal, the price of a good and demand for it are inverse proportional, so if we decrease the price the demand for it will rise. We can prove it very easily, since we know that every additional unit of a good produce less marginal benefit than one got before, people will purchase it only if the price will diminish. Also, when the price for that good or service is less, the income effect indicates that we can purchase more of it since our purchasing power raised.  We can mention, that substitution effect suggests that buyers can change between some complementary goods if the price of one has relatively fallen.

What can we say about demand curve?  It is for sure a downsloping, because of  inverse(negative)  relationship between quantity demanded of good or service and its price. We should make a difference among change in quantity demanded and change in demand. First one, suggest that it’s a movement from one point to another on the same curve, but latter one suggests that the whole curve has shifted.

In most of cases it is stated that the price of good is the most important factor that affects quantity demanded. So, what factors can affect demand?

  1. Change in consumers’ taste– More that good is desired, more it is bought.
  2. Number of buyers-An increase in number of buyers creates a higher demand.
  3. Price of related goods-An increase in price of supplementary goods, creates a higher demand for our good. If the price of complementary good is decreased the demand for our good is increasing.
  4. Expectations-If people think that the price of good will increase in near future, they will want to buy more of it now, when the price is relatively low.

Key Terms:

Market-Any institution or mech­anism that brings together buyers and sellers of particular goods, services, or resources for the purpose of exchange.

Demand-A schedule or curve that shows the various amounts of a product that consumers are willing and able to purchase at each of a series of possible prices during a specified period of time.
Law of demand-The principle that, other things equal, an increase in a prod­uct’s price will reduce the quantity of it demanded; and conversely for a decrease in price.
Marginal utility- The extra utility a con­sumer obtains from the consumption of one additional unit of a good or service.
Income effect-A change in the price of a product changes a consumer’s real income (purchasing power) and thus the quantity of the prod­uct purchased.
Substitu­tion effect-A change in the price of a consumer good changes the relative expensiveness of that good and hence changes the willing­ness to buy it rather than other goods.
Demand curve-A curve illustrating the inverse (negative) relationship between the quantity demanded of a good or service and its price, other things equal.
Normal good-A good or service whose consumption rises when income increases and falls when income decreases, price remaining constant.
Inferior good-A good or service whose con­sumption declines as income rises (and conversely), price remaining constant.
Substitute goods-Products or services that can be used in place of each other.
Complemen­tary goods-Products and serv­ices that are used together.

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