What is Demand ? Explain the characteristics of Demand ?
The Correct Answer and Explanation is :
Demand in economics refers to the quantity of a good or service that consumers are willing and able to purchase at various prices during a specific period of time. Demand is influenced by various factors, including price, consumer income, preferences, and the prices of related goods. The concept of demand is fundamental in understanding how markets work, as it helps determine the price and quantity of goods and services exchanged.
Characteristics of Demand
- Law of Demand: The law of demand states that, all else being equal, as the price of a good or service rises, the quantity demanded decreases, and as the price falls, the quantity demanded increases. This negative relationship between price and quantity demanded is illustrated by a downward-sloping demand curve.
- Quantity Demanded: This refers to the specific amount of a good or service that consumers are willing to buy at a particular price. It is important to differentiate between a change in the quantity demanded (which is caused by a change in price) and a change in demand (which occurs due to other factors like income or preferences).
- Determinants of Demand: Several factors can cause a shift in the demand curve:
- Income: As consumers’ income increases, they tend to demand more goods and services, shifting the demand curve to the right.
- Preferences: Changes in consumer tastes and preferences can lead to an increase or decrease in demand.
- Prices of Related Goods: The demand for a good can be affected by the prices of related goods, either substitutes or complements. For example, an increase in the price of tea may lead to an increase in demand for coffee, a substitute.
- Expectations: If consumers expect prices to rise in the future, they may increase current demand.
- Elasticity of Demand: Demand is not always the same in terms of responsiveness to price changes. Elastic demand refers to a situation where demand changes significantly with a small change in price, while inelastic demand means that price changes have little to no effect on the quantity demanded.
- Consumer’s Budget: Consumers’ budget constraints also affect demand. If the price of a product rises beyond what consumers are willing to pay, they may reduce their quantity demanded or stop purchasing altogether.
In summary, demand is influenced by price, income, preferences, and related goods. Understanding these characteristics helps businesses and policymakers make informed decisions about pricing and production.