Market demand. Demand curve. Law of demand

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:45

Economics involves many terms, rules, laws, formulas, hypotheses, and ideas. No statement can be absolutely right or wrong. The thought of every economist lends itself to criticism. After all, unlike mathematics, there are simply no exact rules, such as two times two equals four.

This is due to many factors. The main one is hidden in the very object of research, which is chosen by this science as a key one - the relationship between the subjects of market relations.

How to understand this? What is good for one is not always good for another. Each participant in market relations has its own marginal utility of a particular product, product, service. Someone produces and someone consumes.

This article details the market demand, the demand curve, factors affecting its level.

Types of demand

The study of a science such as economics always begins with an explanation of the concepts of supply and demand. They are the tool, knowing which, you can begin to study economic ties and relations between market participants.

So, demand is a declared need for some good of a market subjectrelations. For example, if you have money for a certain good that you need, then you are already creating demand for this good.

In addition, demand depends on market elasticity, which describes the relationship between supply and demand through the price level for the necessary goods.

In this case, individual, market and aggregate demand are singled out. They differ only in the number of participants and the scale of the market.

Thus, individual demand is the need for a product that exists with a particular buyer. For example, if you specifically need an aquarium, this is your individual demand.

Market demand is a general economic value that combines several individual demands. Through this type of demand, the need for a batch of goods of a certain category of consumers is determined. That is, in comparison with the first type, this is a broader concept that depends not on one subject of market relations, but on the whole group.

Aggregate demand is the sum of all local demands that exist in a particular market. We can say that it characterizes the need of all subjects of economic relations for various goods, but in the plane of one market, that is, the combined market demand.

Demand curve. The Law of Demand

Economists use laws to characterize each concept, derive formulas and draw up graphs. Demand itself is described in the same way.

Under the law of demand, the hypothesis is assumed that the lower the price of a product, the more units it hascan be sold ceteris paribus. The assumption looks absolutely plausible only at first glance, but it is it that allows you to take the first steps in the economic analysis of the values of demand in the market.

If we take into account such a thing as the elasticity of demand, then the law becomes not completely correct, but we will talk about this later.

What tools can be used to analyze market demand? The demand curve is used to visualize the results obtained from collecting data on the demand for goods and services. It is a graph that is compiled based on the collected data on the level of demand depending on changes in the price of products.

For example, we have the following data:

service price, c.u. (P)	demand level, c.u. (q)
11	25
15	22
20	21
25	16

Let's imagine that the above table characterizes a certain market demand. The demand curve will look like this:

As you can see, the demand is not directly dependent on the price of the goods, but is represented by a curved line. In the same way, any market demand can be graphically depicted. The demand curve always shows the pricedependence on the needs of market entities.

Demand equation

It can be seen that each price corresponds to its own level of demand. In economics, scientists are able to describe any phenomenon using a specific formula. How to apply this to our research object?

The market demand curve shown above can be described using a special formula. Using it, you can easily and at any time find out how much demand will fluctuate with specific price changes.

This is very useful information for sales directors (managers), commercial managers of any enterprises, firms, companies that sell any product. After all, in most markets there is competition, and in the pursuit of profit, do not forget that demand can change.

The market demand curve equation can be represented as follows:

Р=x - yq, where:

x, y - parameters that are obtained by analyzing the state of the market. “x” is the price level at which demand will be equal to 0. At the same time, “y” is responsible for the degree of slope of the curve relative to the axis. This means that the second variable determines the intensity with which demand changes depending on the unit of price change.

The chart can be used in practice

Applying this equation in practice, it becomes obvious that the market demand curve shows how the volume of sales of products will decrease when their price increases. Of course, you need to look for the situation when there is an interaction of the maximum possible price with the largestsales volume of the product. Only in this case it will be possible to say that the company receives the maximum income from its activities.

So, the basic principle of the law of demand is preserved: the lower the price P, the more goods can be bought. But that's only in this particular case. What can influence the situation?

Elasticity is a factor affecting demand

Elasticity of demand is an indicator that allows you to determine the degree of dependence of consumer activity on the price or income level of buyers for purchased goods or services.

In this case, let's take a closer look at price elasticity of demand.

Types of elasticity

Depending on the model and type of economic model for building market relations, the following types of demand can be distinguished:

1. Perfect stretchy.
2. Elastic.
3. Partly elastic.
4. Inelastic.
5. Totally inelastic.

The first type of indicator means that the product is not strategic for the buyer, it has many substitutes or analogues, which means that demand will react sharply to price changes. It can also be said that there is only one acceptable price for a good at which there will be a demand for it.

The second type says that price fluctuations are less than changes in demand. This often happens when the product is close toluxury goods.

With partial elasticity, the market demand curve shows that demand changes in proportion to price. That is, on the graph one could observe a straight line that would intersect both axes at the same distance from their beginning.

Demand does not always depend only on price

Next, inelastic demand. It can usually be seen in the market for goods that people use daily. It can be soap, toilet paper, razor blades, and the like. That is, those groups of goods that consumers really need, and they are ready to overpay a little for them.

It can also be products that are presented on the market in a rather narrow range, and there are a small number of substitute products for it.

The last thing to consider is perfectly inelastic demand. In this case, the market demand curve shows a situation where the demand for a product does not depend on its price. On the chart, this can be seen as a line parallel to the price axis.

This is what happens when the market for essential goods is explored. They can be: medicines, medical supplies, certain groups of food products (bread, water, etc.), utilities (electricity, water, gas), etc.

What else affects demand?

Individual and market demand curves help analyze buying activity and find the best price/volume ratio.

The chart above showsdependence of the level of demand on the price of goods. But it is worth noting other factors that affect demand. The full list is below:

1. Valuation in the price of the item of interest.
2. Changes in the cost of substitute goods or components.
3. Purchasing power of consumers (income).
4. Fashion trends.
5. Seasons.
6. Forecast changes in the market (for example, rumors of a crisis, inflation, etc.).

How will the demand curve behave in these cases?

The aggregate market demand curve will shift to the right along the x-axis in such situations:

• growth in the cost of substitute goods;
• components are getting cheaper;
• growing consumer income;
• advertising campaign gets bigger;
• the season of active use of the goods is coming;
• rumors of a rise in price of goods.

The reverse situation will be observed if:

• substitute goods are getting cheaper;
• components become more expensive;
• reduced incomes of buyers;
• The product is no longer considered fashionable, modern.

Indeed, there are a lot of factors affecting the level of demand, and it can be easily calculated using the appropriate formula and graph.

When exercisinganalysis, it is important to understand that the market does not stand still and is constantly evolving, so it is best to use the demand curve, as well as conduct research in dynamics.