Demand is the amount of services or goods that a consumer is willing to purchase within a certain time at a certain price. The magnitude of demand depends both on the price of the goods and on taste, income and the number of customers. The main factor influencing it is the price. The relationship between the volume of customer demand and the price of a product is reflected in the law of demand. Its meaning is described by the following dependence: the more expensive the product, the lower the number of buyers willing to purchase it, respectively, lower demand. And, on the contrary, in the presence of other equal conditions, the demand increases with a decrease in prices. Consequently, a negative, inverse relationship has been established between these indicators.
This connection is explained by the following reasons:
The established high price causes consumer reluctance to purchase goods, while the lower one increases the number of purchases and the number of buyers, as a result of which demand and demand increase.
The principle of marginal diminishing utility has an effect on consumption, which shows that the purchase of subsequent units of a particular product brings less satisfaction, and the purchase of an additional quantity of goods is possible only if the price is reduced.
The economic law of demand is also explained by the effect of replacing income, which indicates that a lower price allows a person to purchase a larger volume of a given product, while he does not deny himself the purchase of other alternative products. The substitution effect itself marks the desire of the buyer to replace expensive products with cheaper ones.
Change in demand
In addition to price, demand is influenced by many other factors:
Firstly, a change in the taste of consumers (the popularity of physical health causes an increase in demand for sports goods).
Secondly, a change in the number of customers (a decrease in the birth rate reduces the consumption and demand for goods for children).
Change in income (increasing welfare increases the consumption of fruits, meat, while reducing the demand for bread, potatoes, pasta, etc.).
Change in prices for related services and goods (reduction of tariffs for air transportation of passengers minimizes the demand for tickets for other modes of transport).
Change in buyers' expectations (the emergence of information on a decrease in purchases of imported sunflower oil will cause an increase in the price of this product and an expansion of current demand for oil).
Changes in the country's economic policy (lowering tax rates leads to higher incomes, and, as a result, to higher demand and consumption).
The law of demand gives the behavior of sellers and buyers an economic objective assessment, which allows us to predict their reaction to price changes.
But, as practice shows, situations arise - exceptions to the law of demand. For example, with an increase in the price of essential goods (meat, potatoes, salt, bread), the demand for them continues to increase. In this case, an increase in demand was provoked by the emerging tendency to increase prices. Buyers are waiting for an even greater increase and increase purchases of these products.
Exceptions to the rules of the law of demand are described by the Giffen effect. This English economist found that lowering the price of luxury goods does not cause an increase in demand, but, on the contrary, provokes its decline. It was established that these products are bought not only because of high consumer properties, but in many ways to show the high status of a person, and a decrease in price reduces their attractiveness.
There is also the Veblen effect, according to which, in the short term, an increase in the price of a product increases the value of demand. In this case, we can talk about consumer expectations of a new increase in the near future price of goods.