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 equilibrium and resource allocation.

Factors Influencing Demand

Several factors can cause a change in demand. These factors can shift the entire demand curve to the left or right.

Changes in Consumer Income

• Normal Goods: As income increases, demand for normal goods increases.
• Inferior Goods: As income increases, demand for inferior goods decreases. (e.g., cheaper alternatives are preferred)

Changes in the 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).

Changes in Consumer Tastes and Preferences

Changes in fashion, advertising, health trends, or other factors can significantly impact demand.

Consumer Expectations

If consumers expect prices to rise in the future, they may increase their current demand. Conversely, if they expect prices to fall, they may decrease their current demand.

Population Changes

An increase in the population generally leads to an increase in the demand for most goods and services.

Graphical Representation of Changes in Demand

Summary Table

Understanding these factors is essential for analyzing how markets respond to changes in consumer desires and for predicting shifts in market equilibrium.