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Managerial Econ

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5 views12 pages

Managerial Econ

Uploaded by

clairedianetindoc06
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Demand Theory

Demand Theory

Demand Theory is an economic principle relating to the


relationship between the demand for consumer goods
and services and their prices in the market. Demand
theory forms the basis for the demand curve, which
relates consumer desire to the amount of goods
available. As more of a good or service is available,
demand drops and so does the equilibrium price.
Understanding the Demand Theory

• Demand is simply the quantity of a good or service that


consumers are willing and able to buy at a given price in a
given time period. The demand for a product at a certain
price reflects the satisfaction that an individual expects
from consuming the product.

• The demand of satisfaction is referred to as utility, and it


differs from consumer to consumer.
• (1) Its utility to satisfy a want or need, and (2) the
consumer’s ability to pay for the goods and services.
Real demand is when the readiness to satisfy a want is
backed up by the individual’s ability and willingness to
pay.

• Demand Theory is one of the core theories of


microeconomics. It aims to answer basic questions
about how badly people want things, and how demand
is impacted by income levels and satisfaction (utility).
• The market system is governed by the laws of supply
and demand, which determine the prices of goods and
services. When supply equals demand, prices are said
to be in a state of equilibrium. When demand is higher
than supply, prices increase to reflect scarcity.
Conversely, when demand is lower than supply prices
fall due to the surplus.
The Law of Demand and the
Demand Curve
• The law of demand introduces an inverse relationship
between price and demand for a good or service. It
simply states that as the price of a commodity
increases, demand decreases, provided other factors
remain constant. Also, as the price decrease, demand
increases. This relationship can be illustrated by the
demand curve.
• Demand curve has a negative slop as it charts downward
from left to right to reflect the inverse relationship between
the price of an item and the quantity demanded over a
period of time. An expansion or contraction of demand
occurs as a result of the income effect or substitution
effect. When the price of a commodity falls, an individual
can get the same level of satisfaction for less expenditure,
provided it’s a normal good. In this case, the consumer can
purchase more of the goods on a given budget.
This is the income effect. The substation effect is observed when
consumers switch from more costly goods to substitutes that have
fallen in price. As more people buy the good with the lower price,
demand increases.

• A change in demand refers to a shift in the demand curve to the


right or left following a change in consumer’s preferences, taste,
income, etc. For example, a consumer who receives an income
raise at work will have more disposable income to spend on
goods in the markets, regardless of whether prices fall, leading
to a shift to the right of the demand curve.
Supply and Demand

• The law of supply and demand is an economic theory


that explains how supply and demand are related to
each other and how the relationship affects the price of
goods and services.

• There is an inverse relationship between the supply and


prices of goods and services when demand is
unchanged.
Factors Affecting Demand

• Price

• Perceived quality of that product

• Prices of competing products

• Income levels of the buyer

• Consumer Preferences
How does Demand Affect the
Prices?

• Prices tend to increase during periods of high demand

and fall when demand is low


Demand Theory

• The theory of demand, usually associated with economist


Adam Smith, represents one half of the theory of supply
and demand that forms the organizing principle for market
economies. It states that prices rise for goods that are in
demand, and fall for the goods that are not in demand.
These prices act as a market signal to producers, telling
them when to produce more or less of a given good.

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