What is demand?

In economics demand is how many goods and services are bought by consumers at different prices during a certain period of time.

Think of demand as an underlying force that drives everything in the economy.

Demand in economics is not used to mean - I demand something! - which is how the word is normally used. Demand is your willingness to go and buy a certain product or service.

Below is an example of what the demand curve looks like:

On the y axis - the vertical line - we always have price.

On the x axis - the horizontal line - we always have quantity.

The downward sloping line is the demand curve.

Every point on the demand curve will give us information about how much of a good or service is consumed at a certain price.

Contructing the demand curve

The demand curve is a graph of the relationship between price of the good and the quantity demanded.

Below is the demand schedule for the market, the demand schedule is a table that shows the relationship between the price of the good and the quantity demanded.

Price per tonne (£)	Quantity Demanded (tonnes)
1500	400
1200	500
1000	600
750	700
500	800

The demand curve is constructed by showing prices on the vertical axis and quantity demanded along the horizontal axis.

By plotting the points above we find the following:

Higher prices lead to lower quantities being bought

Lower prices lead to higher quantities being demanded

We call this the Law of Demand.

Why does the demand curve slope downwards?

The short answer is that the cheaper a good /service is, the more of it consumers want to buy.

The long answer is that the demand curve slopes downwards for three reasons:

1. Income Effect

When the price of a good / service falls, consumer's real income rises, that means the consumer can now purchase more of the good / service with the same income.

2. Substitution Effect

When the price of a good / service rises, it becomes cheaper to buy a alternative good (a substitute). As a result, quantity demanded will fall since consumers shift their demand to the alternative good.

3. Law of Diminishing Marginal Utility

The satisfaction derived from consuming a good / service will diminish with each additional unit consumed. Therefore the consumer is willing to pay less for each successive unit of good / service.

Shifts of the demand curve

The demand curve can shift outwards or inwards due to a change in an underlying factor of demand.

A change in price will not shift demand.

When price changes we move along the curve - when any other factors change it moves the entire curve.



1) Quality of the good

The quality of a good or service may rise due to research and development. A more advanced good will be more desirable to consumers and demand will shift outwards.



2) Advertising

The use of advertising will increase the awareness and perhaps the attraction of a product, thus shifting demand outwards.



3) Fashion

If a good becomes fashionable then demand will shift outwards



4) Price of Substitue goods

If the price of a substitute good falls then demand for the original good will shift inwards. For example if the price of Pepsi falls below the price of Coke then demand for Coke will fall. (See Substitute Goods )



5) Price of Complementary goods

If the price of a completementary good falls then demand will increase. For example if the price of fish falls, then demand for chips will shift outwards.



6) Weather

Change in the weather may dictate an increase or decrease in demand. For example, sustained periods of snow may increase demand for snow boards.



7) Regulation

The law also has an impact on demand. If a law is introduced sanctioning a good, then demand fill reduce. Although demand may still exist in the black market.



8) Income

If disposable income rises then demand for luxury goods will rise (See Income Elasticity of Demand )



9) Expectations of future prices

If consumers feel that prices will rise in future, then demand may increase in the short-term.