Q&A - What is demand?

Demand can be defined as:

The amount (quantity) that customers are prepared to buy at a given price

As customers, in an ideal world we would be able to buy whatever we wanted.  However, we are restricted by a simple problem – we don’t have unlimited money!

So, economists often prefer to talk about “effective demand” – which means the quantity that customers are able to buy.

Effective demand is all about the ability and willingness of customers to pay – or how much they can afford.

Normally, the quantity demanded for a product will increase if the price falls.  Conversely, an increase in price will normally lead to a fall in quantity demanded.

The relationship between quantity demanded and price can be shown graphically by drawing a demand curve, as illustrated below:

There are two reasons why more is demanded as price falls:

1.The Income Effect:

There is an income effect when the price of a good falls because the consumer can maintain current consumption for less expenditure.  Provided that the good is normal, some of the resulting increase in real income is used to buy more of this product. 

2 The Substitution Effect:

There is a substitution effect when the price of a good falls because the product is now relatively cheaper than an alternative item and some consumers switch their spending from the good in competitive demand to this product.

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