Monday, July 28, 2014

Demand and Law of demand

What is demand?

Demand is defined as want or willingness of consumers to buy goods and services. In economics willingness to buy goods and services should be accompanied by the ability to buy (purchasing power) and is referred to as effective demand.

Types of demand

Composite demand: It is when a good is demanded for two or more uses. For example oil may be used to run a car or as a fuel in a factory.
Joint demand: It is when two goods are bought together. Mouse is bought with a mouse pad.
Derived demand: It is when demand for one good occurs as a result of demand for another. Example, If more goods are made, more labour is needed. Hence demand for labour is derived demand.

Law of demand

It states that when price increases, the amount demanded will fall and when prices fall, the amount demanded will rise.
This phenomenon when plotted on a graph is known as Demand Curve.
demand curve


Law of Demand

The law of demand states that other factors being constant (cetris peribus), price and quantity demand of any good and service are inversely related to each other.


Definition: The law of demand states that other factors being constant (cetris peribus), price and quantity demand of any good and service are inversely related to each other. When the price of a product increases, the demand for the same product will fall.

Description: Law of demand explains consumer choice behavior when the price changes. In the market, assuming other factors affecting demand being constant, when the price of a good rises, it leads to a fall in the demand of that good. This is the natural consumer choice behavior. This happens because a consumer hesitates to spend more for the good with the fear of going out of cash.
The above diagram shows the demand curve which is downward sloping. Clearly when the price of the commodity increases from price p3 to p2, then its quantity demand comes down from Q3 to Q2 and then to Q3 and vice versa.

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