Demand Defined
- 1. Demand Defined What is it?
- 2. Demand Defined Demand, as defined by Amosweb.com, is “The willingness and ability to buy a range of quantities of a good at a range of prices, during a given time period.” In simpler terms, demand occurs when a consumer wants something, and has the means to obtain it. However, Demand is not always that straightforward. It is affected by what is termed the Law of Demand. This is the relationship between the Consumer’s Demand for a good and the Producer’s Price for a good. Simply put, the higher the price of a good, the lower the quantity demanded, or, the lower the price of a good, the higher the quantity demanded. The Law of Demand itself is derived from two separate, but equally important, forces: Income Effect and Substitution Effect
- 3. Income Effect The Income Effect is the result of “…the purchasing power of the income change (-ing), even though money or nominal income remains the same” (Amosweb.com). For example, if the price of the selected good goes up, less is purchased because the total amount of resources, money, used to make the purchase has not increased to offset the price change. Remember scarcity? The consumer still has limited resources with which to work. They will purchase less of the selected good, as well as less of other goods, as they must allocate more of their resources to meet their demand for the selected good.
- 4. Substitution Effect The Substitution Effect “…occurs because a change in the price of a good makes it relatively higher or lower than the prices of other goods that might act as substitutes.” (Amosweb.com). For example, if the price of the good that a consumer wants increases, the consumer can opt to choose a similar good to meet their demand as opposed to paying more for the good that they initially selected. Demand for the initially selected good will decrease, but demand for the substitute good will increase.