subsequent analysis of Demand - Business Environment

The quantity demanded refers to the quantity of a good or service that household sare willing and able to purchase at a particular price. This definition shows that it iseffective demand that is important; although many people would like to own a Rolls-Royce they could not afford it and so their demand is not effective on the market. The demand for a good or service depends on a number of factors, the most important of which are:

  • the price of the good;
  • the prices of other goods;
  • disposable income; and
  • tastes.

  • To begin with, the relationship between quantity demanded and price will be looked at, assuming that the other factors above remain the same. This assumption will be relaxed in the subsequent analysis.

    A-demand-curve for real brew daughter beer

    Note that demand is measured over some period of time. The information is then presented in a graphical form in Figure the line joining the various combinations of price and quantity demanded is called a demand curve. The demand curve shows that if all of the other factors which influence demand are constant then as price goes up, quantity demanded goes down. This is commonly referred to as ‘the law of demand’. What happens when price rises is that some individuals will cut down their consumption of beer and others mays witch to other types of beer. There are some goods where this relationship might not hold for example, in the stock market where a rise in share prices might lead to the expectation of further price rises and therefore an increase in demand on the part of those wishing to make a capital gain. However, these exceptions are rare and it is therefore safe to assume that the law of demand holds. If the price of beer changes, there is a movement along the demand curve. For example, if the price of beer goes up from 90p a pint to £1.00 a pint, the quantity demanded goes down from 83 000 pints per week to 70 000 pints per week. In drawing the demand curve the assumption was made that other factors affecting demand are constant. If this assumption is relaxed, what happens to the demand curve?

    Price of other goods
    The quantity of beer consumed will be affected by the prices of other goods. These other goods are likely to be substitutescomplements. A substitute for beer may be lager, and if the price of lager goes down, some individuals may switch from beer to lager; thus the demand for beer goes down. What happens to the demand curve is that at all price levels, the demand for beer is now lower. Thus the demand curve shifts to the left, indicating that at £1.00 per pint only 60 000 pints of beer are demanded per week. If the price of a substitute goes up, there will be an increase in the demand for beer. The demand curve moves to the right. These movements are shown in Figure. The closer the goods are as substitutes and the greater the change in the price of the substitute, the greater will be the shift in the demand curve. A complementary good is one which tends to be consumed with another good.For beer, it is possible that individuals eat crisps or smoke cigarettes at the same time as drinking beer. The relationship is the opposite of that for substitutes. If the price of a complement goes up, individuals might be less likely to drink beer, and demand will fall. The demand curve moves to the left. If the price of a complement goes down, the demand for beer will rise. Again the closer the goods are as complements, and the greater the price change of that complement, the greater will be the shift in the demand curve.
    Disposable income
    Changes in disposable income will clearly affect demand. If the economy moves into recession, then retail sales and the housing market might suffer. As incomes increase once the economy recovers, then such sectors will pick up again. Higher incomes will lead to increased consumption of most goods. If your income is boosted, how will this affect your consumption? You might buy more textbooks, and probably spend more money on leisure activities and clothes. Most students might also drink an extra pint of beer per week. Thus an increase in disposable income will lead to an increase in demand for these goods, indicated by a rightward shift in the demand curve. As incomes fall the demand for these goods will fall, indicated by a leftward shift in the demand curve. These types of goods are called normal goods.

    Shifting-demand-curves

    There are goods, however, that experience a fall in demand as a result of income increases. These goods are called inferior goods. A good example is hard toilet paper; as individuals become richer, they are likely to substitute more expensive soft toilet paper, and thus the demand for hard toilet paper will fall.

    Tastes

    Taste includes attitudes and preferences of consumers, and will be affected by such things as fashion, and advertising campaigns by producers or by governments. For example, a successful advertising campaign by the government pointing out the effects of smoking would cause tastes to change and demand for cigarettes to fall. The demand curve, then, is downward sloping, indicating that as the price of the good rises the quantity demanded by households falls, shown by a movement along the demand curve. Changes in the other determining factors lead to movements of the demand curve.


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