- Demand is the quantity of a the good or service purchased at a given price over a certain time frame. It is how much buyers are willing to pay for a given quantity of goods.
- The demand curve depicts the relationship between quantity of the good or service bought at different price levels in a given period of time.
- The demand curve is downward sloping due to the concept of diminishing marginal utility.
The law of diminishing marginal utility states that as a person consumes more of a product, their utility obtained from consuming each extra unit decreases. So, the marginal utility of consuming the fourth product is lower than that of consuming the first.
At high quantities, more units of the product are consumed and so prices are low as the utility obtained from consuming an additional product is low. At low quantities, less units of the product can be consumed and so the marginal utility stays high, thus prices are high. Due to this concept, the demand curve is downwards sloping.
- A movement along the curve is due to price changes. If there is a decrease in price then the quantity demanded increases and so you move down the demand curve, this is an expansion of demand. If there is an increase in price then you move up the demand curve and so quantity demanded decreases, this is a contraction of demand.
- Shifts in the demand curve are caused by factors such as:
- Population: Larger population size or a change in the age structure of the population may lead to higher demand depending on whether your product is aimed at the age where population has increased.
- Income: More disposable income means the consumers are able to spend more and so demand rises. However, this may not be the case if the product is an inferior good.
- Related goods: Prices of substitutes falling or prices of complimentary goods rising leads to an inward shift of the demand curve due to a decrease in demand. Whereas, a rise in price of a substitute or fall in price of a complimentary good shifts the demand curve outwards as there is an increase in demand.
- Advertising: An increase in advertising will attract more customers and so increase demand and shift the curve outwards.
- Tastes or fashion: If the product is in fashion then the demand curve will shift outward as there is an increase in demand for the product.
- Expectations: If consumer confidence is high and people are predicting a rise in prices in the future, the demand for the product will increase as people will want the product now. The same goes for the shares in the company, if demand is likely to increase then speculators will buy shares in the company leading to an increase in demand for shares of the company (if it’s a public limited company A.K.A PLC).
- Seasonal: Demand may increase for turkeys during Christmas and so the demand curve shifts outwards whereas at other times of the year the demand is comparatively lower and therefore the demand curve shifts inwards.