2.3 Demand

2.3.1. definition of demand

2.3.2. price, demand and quantity

2.3.3. individual and market demand

2.3.4. conditions of demand

By the end of this chapter, students should be able to:

★ define demand

★ draw and interpret appropriate demand diagrams

★ explain movements (contractions and expansions) along a demand curve

★ explain the link between individual and market demand

★ explain the causes of shifts in a demand curve.

Demand

Demand refers to both the willingness and the ability of customers to pay a given price to buy a good or service. This is sometimes referred to as effective demand to distinguish genuine demand from a desire to buy something.

The amount of a good or service demanded at each price level is called the quantity demanded. In general, the quantity demanded falls as price rises, while the quantity demanded rises at lower prices. Hence, there is an inverse relationship between the price of a good or service and the quantity demanded.

This rule is known as the law of demand. There are two reasons for this relationship:

» As the price of a good or service falls, the customer’s real income rises — that is, with the same amount of income, the customer is able to buy more products at lower prices.

» As the price of a good or service falls, a higher number of customers are able to pay, so they are more likely to buy the product.

Determinants of demand

Although price is regarded as the key determinant of the level of demand for a good or service, it is not the only factor that affects the quantity demanded.Other determinants of demand can be remembered by the acronym HIS AGE:

» Habits, fashions and tastes — changes in habits, fashions and tastes can affect the demand for all types of goods and services. When products become fashionable (such as smartphones) this leads to an increase in demand for them, whereas those that become unfashionable (such as last season’s clothes) have a reduced level of demand.

» Income — higher levels of income mean that customers are able and willing to buy more goods and services. For example, the average person in the USA will have a higher level of demand for goods and services than the average person in Vietnam or Turkey.

» Substitutes and complements — substitutes are goods or services that can be used instead of each other, such as Coca-Cola or Pepsi and tea or coffee. If the price of one product falls, then it is likely the demand for its substitute will also fall. Complements are products that are jointly demanded, such as tennis balls and tennis racquets or cinema movies and popcorn. If the price of one product increases, then the demand for its complement is likely to fall.

» Advertising — marketing messages are used to inform, remind and persuade customers to buy a fi rm’s products. Companies such as McDonald’s, Apple and Samsung spend hundreds of millions of dollars each year on their advertising budgets in an attempt to increase the demand for their products.

» Government policies — rules and regulations such as the imposition of taxes on tobacco and alcohol will affect the demand for certain products. Sales taxes cause prices to increase, thereby reducing the level of demand. By contrast, government subsidies for educational establishments and energy-effi cient car makers help to encourage more demand for education and environmentally friendly cars due to the relatively lower prices.

» Economy — the state of the economy (for example, whether it is in an economic boom or a recession) has a huge impact on the spending patterns of the population. The global fi nancial crisis of 2008, for example, caused the demand for most goods and services around the world to decline as households and businesses lacked confi dence in the economy. By 2013, the financial crisis had caused unemployment to exceed 26 per cent in both Greece and Spain — the highest unemployment fi gures ever experienced in the European Union. This undoubtedly reduced the level of demand for goods and services in these countries.

There are other factors that can infl uence the level of demand for a particular good or service. For example, the weather can affect the demand for ice cream, beach resort holidays, winter jackets and umbrellas. The size and the demographics of the population (such as age, gender, ethnicity and religious beliefs) can also have an effect on the level of demand for goods and services. For example, adults and children have different buying habits.