The Allocation of Resources - Demand

This section explores the concept of demand in economics, focusing on the factors that cause changes in the quantity of goods and services consumers are willing and able to purchase. Understanding these factors is crucial for analyzing market shifts and predicting economic trends.

Causes of Extensions in Demand

An extension in demand refers to an increase in the quantity of goods and services consumers want to buy at a given price. Several factors can lead to this increase:

• Increase in Consumer Income: When consumers have more disposable income, they are generally willing to purchase more goods and services, especially those considered normal goods.
• Change in Consumer Tastes and Preferences: Shifts in fashion, trends, or advertising can increase the demand for specific products.
• Decrease in the Price of Related Goods:
  • Substitute Goods: If the price of a substitute good decreases (e.g., tea becomes cheaper, demand for coffee might increase).
  • Complementary Goods: If the price of a complementary good decreases (e.g., the price of printers decreases, demand for ink might increase).
• Increased Population: A larger population generally leads to higher overall demand for goods and services.
• Expectations of Future Price Increases: If consumers expect the price of a good to rise in the future, they may increase their current demand.

Causes of Contractions in Demand

A contraction in demand refers to a decrease in the quantity of goods and services consumers want to buy at a given price. The following factors can cause this contraction:

• Decrease in Consumer Income: When consumers have less disposable income, they tend to reduce their spending, particularly on non-essential goods.
• Change in Consumer Tastes and Preferences: Shifts in tastes can lead to a decrease in demand for certain products.
• Increase in the Price of Related Goods:
  • Substitute Goods: If the price of a substitute good increases (e.g., coffee becomes more expensive, demand for tea might decrease).
  • Complementary Goods: If the price of a complementary good increases (e.g., the price of printers increases, demand for ink might decrease).
• Decreased Population: A smaller population generally leads to lower overall demand for goods and services.
• Expectations of Future Price Decreases: If consumers expect the price of a good to fall in the future, they may postpone their purchases.

Graphical Representation

The relationship between price and quantity demanded is typically represented by a downward-sloping demand curve. This curve illustrates the inverse relationship between price and quantity demanded, assuming all other factors remain constant. Changes in the factors mentioned above will cause the entire demand curve to shift either to the left (contraction) or to the right (extension).

Summary Table