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Understanding The Theory of Demand

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7 views

Understanding The Theory of Demand

Uploaded by

tanikajohn761
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Understanding the

Theory of Demand

Demand is the consumer's desire and willingness to purchase a good


or service at various prices over a given period of time. It is a
fundamental concept in economics that describes the relationship
between the price of a product and the quantity demanded.

by Vivek Persaud
Laws of Demand
Law of Demand Exceptions Reasons
There is an inverse Certain goods, such as luxury The law of demand is based
relationship between the price items or status symbols, may on the principles of
of a good and the quantity exhibit a positive relationship diminishing marginal utility
demanded, assuming all other between price and quantity and the income effect.
factors remain constant. demanded.
Factors Affecting Demand

1 Price of the Good 2 Income of Consumers


The price of the good itself is the primary Changes in consumer income can affect
determinant of demand. the demand for normal and inferior goods.

3 Prices of Related Goods 4 Consumer Preferences


The demand for a good can be influenced Changes in consumer tastes, fashion, and
by the prices of substitute or habits can shift the demand curve.
complementary goods.
Movement Along the Demand Curve

Increase in Price Decrease in Price Constant Demand


A rise in the price of a good A fall in the price of a good The demand curve itself
leads to a decrease in the leads to an increase in the remains unchanged, only the
quantity demanded, moving quantity demanded, moving price and quantity change.
along the demand curve. along the demand curve.
Shift in the Demand Curve
Increase in Demand Causes of Shifts
A shift of the demand curve to the right, Changes in factors other than the price of the
indicating an increase in the quantity good, such as consumer income, prices of
demanded at any given price. related goods, or consumer preferences.

1 2 3

Decrease in Demand
A shift of the demand curve to the left,
indicating a decrease in the quantity
demanded at any given price.
Determinants of Demand Shift
Income Prices of Related Goods
An increase in consumer income can shift the A change in the price of a substitute or
demand curve for normal goods to the right complementary good can shift the demand
and for inferior goods to the left. curve for the good in question.

Consumer Preferences Number of Consumers


A change in consumer tastes, fashion, or An increase in the number of consumers can
habits can shift the demand curve for a good. shift the demand curve to the right.
Elasticity of Demand

Price Elasticity Income Elasticity Cross-Price Time Elasticity


Elasticity
Measures the Measures the Measures the Measures the
responsiveness of responsiveness of responsiveness of responsiveness of
quantity demanded to quantity demanded to quantity demanded quantity demanded to
changes in price. changes in consumer for one good to changes in time.
income. changes in the price
of a related good.
Practical Applications of Demand Theory

Pricing Decisions Firms can use demand theory to determine the


optimal price that maximizes revenue or profit.

Market Segmentation Firms can identify different customer segments


with varying price elasticities and tailor their
pricing accordingly.

Government Policies Policymakers can use demand theory to assess


the impact of taxes, subsidies, or regulations on
consumer behavior.

Business Strategy Firms can use demand theory to forecast


changes in demand and adjust their
production, inventory, and marketing strategies.

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