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Theory of Demand

29-NOV-2014 17:56

    Theory of Demand, tells the relationship between the price of goods and its quantity demanded. If the price of any good or service increases then its demand decreases and vice versa. The better you understand the law of demand, the better you will understand why you pay different prices for different goods. Where there is demand there is a supplier and sometimes suppliers can create demand. There are many factors that influence demand for goods and services in the market place.

    Theory of Demand: Definition

    It defines relationship between the quantitiy of a good consumers will purchase and the price charged for that good. It states that the quantity demanded for a good rises as the price falls, all other things staying the same (no change in the income of the consumer, taste of the consumer and price of other goods). These are other things that can affect demand besides price.

    For example, if you really like Apple products, you might not mind paying a higher price for the new phone that just came out. If you get a new job and your income goes up, you might not mind paying higher prices for certain goods because of your new-found wealth.

    In simple language, we can say that when the price of a good rises, people buy less of that good. When the price falls, people buy more of it. Economists believe strongly in the law of demand because it is so believable for those who don't study economics.

    Figure of Demand Curve is given below:

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    Types of Demand

    The various types of demandsare in general discussed below:

    • Negative Demand – Negative demand is a type of demand which is created if the product is disliked in general. The marketer has to solve the issue of no demand by analyzing why the market dislikes the product and then counter acting with the right marketing tactics.
    • No demands – Certain products face the challenge of no demand.
    • Declining demand – Declining demand is when demand for a product is declining.
    • Irregular demand – These products sell irregularly and sell more during peak season whereas their demand is very low during non-seasons.
    • Full demand – It also means that the markets are happy with the products of the company and that people want to buy from the same company.

    Determinants of Demand

    When factors other than price change, demand will change. These are the determinants of the demand

    1. Income: A rise in a person’s income will lead to an increase in demand a rich consumer demands more.

    2. Consumer Preferences: Favorable change leads to an increase in demand; unfavorable change leads to a decrease.

    3. Number of Buyers: The more buyers lead to an increase in demand; fewer buyers lead to decrease.

    4. Price of related goods:

    a. Substitute goods are those goods that can be used to replace each other. Price of substitute and demand for the other goods are directly related.

    b. Complement goods are those that can be used together. Price of complement and demand for the other goods are inversely related.

    5. Expectation of future:

    a. Future price: Consumers’ current demand will increase if they expect higher future prices. Their demand will decrease if they expect lower future prices.

    b. Future income: Consumers’ current demand will increase if they expect higher future income. Their demand will decrease if they expect lower future income.

    Conclusion

    Demand and supply refer to the relationship price has with the quantity consumers demand and the quantity supplied by producers. As price increases, quantity demanded decreases and quantity supplied increases.Perfect competition represents an economy with many businesses competing with one another for consumer interest and profits.Knowing this will lead countries to specialize and trade products amongst each other rather than each producing all the products it needs.

    Nature of Indian Economy: Structure and Key Features

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