Supply, Demand and Equilibrium
The Law of Demand
The Law of Demand
The Law of Demand states that the connection between the price of a product and the quantity demanded forms an inverse relationship. Put simply, this means that as the price of a product increases, the demand for the product falls. Conversely, as the price of a product rises, the quantity demanded of the good falls.
There are two main reasons that this occurs:
As the price of a product increases, when consumers purchase this good, their real income will fall. This is becuase the good takes up a larger percentage of their income and budget. This means that as prices increase, the quantity demanded falls as goods may be pushed out of peoples budgets.
As the the price of products increase, substitute goods will become more popular. For instance, as the prices of chocolate increases, alteranatives will have a higher level of demand, such as ice cream or buscuits.
Individual and Market Demand
Individual Demand refers to demand of a single person for a certain product within a market. For instance, your personal level of demand for a ice-cream considering your level of income and satisfication.
Market Demand refers to the combined demand of all individuals within a market. This means that each person's unique level of demand for a good or service has been added into a demand curve.
The Effects of Changes in Price
When there is a change in the price of the good, then there will be a movement along the demand curve.
As shown by the model...
An increase in price will decrease the quantity demanded, as consumers do not want to pay more for the same good. This will cause the equilibrium to shift to point (Q1, P1) on the model, demonstrating a contraction of the market.
A decrease in price will increase the quantity demanded, because, consumers are willing to buy more for a cheaper price. This will cause the equilibrium to shift to point (Q1, P1) on the model, demonstrating an expansion of the market.