Definition
Demand is the total quantity of a good or service that consumers are willing and able to purchase at various prices during a given period.
Why It Matters
Demand represents the consumer preferences and purchasing power within an economy. Understanding demand curves is critical for businesses to set optimal prices, forecast sales, and allocate marketing resources, and for economists to analyze consumer utility and welfare.
Core Concepts
- The Law of Demand: All other factors being equal, as the price of a good increases, the quantity demanded decreases. Higher prices discourage purchases due to the substitution effect and income constraints.
- Price Elasticity of Demand: A measure of how sensitive the quantity demanded is to price changes:
- Elastic Demand: A small price change leads to a large change in demand (e.g., luxury items, goods with many substitutes).
- Inelastic Demand: Demand remains relatively stable despite price changes (e.g., life-saving medicine, basic utilities).
- Factors Shifting Demand: Income changes, consumer tastes and preferences, prices of related goods (substitutes and complements), and future expectations.