Demand

It is important, when starting to study economics, to first look at the key concepts of demand and supply. The first blog post will go through demand and other key terms!

It can be said that the theory of supply and demand is the foundation of economics. It observes how buyers and sellers both behave individually, and interact with each other when dealing with goods or services, and how this interaction affects the allocation of an economy's resources. This theory is the groundwork of a model of the market, using supply and demand, which is based on a series of assumptions of and predictions of behaviors. Some argue that this model is unrealistic, with a finite ability to predict behaviours of buyers or sellers.

Firstly, we must understand what a market is:

• A market is a group of buyers and sellers of a particular good or service, where they exchange their needs.

• Competitive markets arise when there are many buyers and sellers so that each has a negligible impact on the market price, for example, farming.

Price is an important aspect of the market! The cost consumers pay represents the value they find in the products that they purchase, and the earnings received by producers reflects a balance between minimizing expenses and maximizing their profits.

There can be many positives of competitive markets. When companies focus on making as much money as possible, and consumers try to get the most satisfaction out of what they buy, the goods or services they both produce and consume are both made efficiently and used in a way that benefits everyone. Therefore, it can be said that it can maximize social welfare.

There are certain economic assumptions that make the competitive market function. These dictate the functioning of demand and supply. To make it easier to understand, they are laid out below in simple bullet points:

The Assumptions of Competitive Markets:

• Numerous buyers and sellers, so that each has no influence over price 

• Buyers and sellers are price takers  - that is, no individual is big enough or has the power to influence price

• There is freedom of entry and exit to and from the market 

• Products are the homogeneous (the same as each other)

• Buyers and sellers act and make decisions independently, and only consider their own situation

• There are clearly defined property rights, so buyers and sellers consider all costs and benefits when making decisions

Here are some key definitions that are essential for understanding Demand:

• Demand is an economic concept that relates to a consumer's desire to purchase goods and services and willingness to pay a specific price for them. (Investopedia, 2023)

• Quantity demanded = The amount of a good that buyers are willing and able to purchase at different prices. (Mankiw & Taylor, 2020)

• Law of Demand: the claim that, other things being equal (ceteris paribus), the quantity demanded of a good falls when the price of the good rises. (Mankiw & Taylor, 2020)

  • The relationship between price and quantity demanded is referred to as the law of demand, and it is shown in a demand schedule, and graphed on a demand curve.

    • NOTE: demand curve is consumer behaviour, and slopes downwards from left to right.

CHANGE IN DEMAND:

A change in demand is the concept where anything in the process changes (other than the price itself), which causes a shift on the demand curve. For example, this could be the income of the buyer.

DETERMINANTS OF SHIFTS:

These are the main factors that I found drive demand and cause a shift in the demand curve:

• The buyer's income;

  • • A normal good = an increase in the income of a buyer then can mean an increase in the demand of a good (and vice versa; if a buyer's income decreased, the demand for certain products would follow), e.g. fancier food. (Mankiw & Taylor, 2020)

  • An inferior good = an increase in a buyer's income leads to a decrease in the demand of a good (and vice versa; for example, bus use would increase when income falls, to save money). (Mankiw & Taylor, 2020)

• The price of the product

• The prices of other similar goods;

  • • Substitutes = the relationship between two goods, for which an increase in price for one leads to an increase in demand for the other (and vice versa; a decrease in price would lead to a decrease in demand for the other substitute), e.g. milk and juice. (Mankiw & Taylor, 2020)

    • Complements =  the relationship between two goods, for which an increase in price for one leads to a decrease in demand for the other (and similarly if a decrease in price would lead to an increase in demand for the other), e.g. cereal and milk. (Mankiw & Taylor, 2020)

• The expectations of consumers for a change in price

• Consumer preferences/tastes

• Size and structure of the population

• Advertising

Finally, we must ask the question: WHY IS DEMAND IMPORTANT?

In short, demand helps fuel profits and the economy (Investopedia 2023). The concept of demand itself holds significant importance for both buyers and sellers of goods and services engaging in the economy.

• Businesses must be aware of demand to accurately deal with pricing, inventory or profit margins.

• Customers can use their knowledge of demand to make informed decisions in the purchasing of products or services.