Summary
Demand analysis focuses on understanding consumer behavior. 'Demand' is the desire for a commodity backed by the ability and willingness to pay for it. The Law of Demand states an inverse relationship between a commodity's price and its quantity demanded, ceteris paribus. This is why the demand curve slopes downwards. Demand is influenced by several determinants besides price, including income, tastes, prices of substitute and complementary goods, and expectations. A change in price causes a movement along the demand curve (expansion or contraction), while a change in any other determinant causes a shift in the entire curve (increase or decrease).
Must Know Points
- Demand = Desire + Ability to Pay + Willingness to Pay.
- The Law of Demand shows an inverse relationship between price and quantity demanded.
- A demand curve slopes downwards from left to right.
- A change in price causes a movement along the demand curve (expansion/contraction).
- A change in other factors (income, tastes etc.) causes a shift in the demand curve (increase/decrease).
- Substitute goods are alternatives (e.g., tea and coffee).
- Complementary goods are used together (e.g., car and petrol).
- Giffen goods are an exception to the law of demand.