The Allocation of Resources - Demand

Objective: Causes of Decreases and Increases in Demand

Demand is the quantity of a good or service that consumers are willing and able to purchase at a given price during a specific period. Understanding the factors that influence demand is crucial for analyzing market dynamics and resource allocation.

Factors Influencing Demand

Several factors can cause a change in the demand for a product. These factors can lead to either an increase in demand or a decrease in demand.

Factors Leading to an Increase in Demand

• Change in Consumer Tastes and Preferences: If a product becomes more fashionable or desirable, demand will increase.
• Change in Income:
  • Normal Goods: As income increases, demand for normal goods increases.
  • Inferior Goods: As income increases, demand for inferior goods decreases.
• Price of Related Goods:
  • Substitute Goods: If the price of a substitute good increases, the demand for the original good will increase. (e.g., If the price of coffee increases, demand for tea might increase).
  • Complementary Goods: If the price of a complementary good increases, the demand for the original good will decrease. (e.g., If the price of petrol increases, demand for cars might decrease).
• Expectations about Future Prices: If consumers expect the price of a good to rise in the future, they may increase their current demand.
• Size and Composition of the Population: A larger population or a population with a higher proportion of consumers of a particular product will lead to an increase in demand.

Factors Leading to a Decrease in Demand

• Change in Consumer Tastes and Preferences: If a product becomes less fashionable or desirable, demand will decrease.
• Change in Income:
  • Normal Goods: As income decreases, demand for normal goods decreases.
  • Inferior Goods: As income decreases, demand for inferior goods increases.
• Price of Related Goods:
  • Substitute Goods: If the price of a substitute good decreases, the demand for the original good will decrease. (e.g., If the price of tea decreases, demand for coffee might decrease).
  • Complementary Goods: If the price of a complementary good decreases, the demand for the original good will decrease. (e.g., If the price of petrol decreases, demand for cars might increase).
• Expectations about Future Prices: If consumers expect the price of a good to fall in the future, they may decrease their current demand.
• Size and Composition of the Population: A smaller population or a population with a lower proportion of consumers of a particular product will lead to a decrease in demand.

Graphical Representation of Demand

The law of demand states that, all other factors remaining constant (ceteris paribus), an increase in the price of a good will lead to a decrease in the quantity demanded, and vice versa. This relationship is typically represented by a downward-sloping demand curve.

Price (P)	Quantity Demanded (Q)
$10	100
$8	120
$6	150
$4	180

Impact of Demand Changes

Changes in demand can have significant impacts on markets. An increase in demand, with supply remaining constant, will lead to a higher equilibrium price and a higher equilibrium quantity. Conversely, a decrease in demand will lead to a lower equilibrium price and a lower equilibrium quantity.