Types of demand: Price demand, Income demand and Cross demand, Changes in demand

Demand refers to the quantity of a good or service that consumers are willing and able to purchase at various prices during a given period. It is influenced by factors such as price, income, tastes, and the prices of related goods. Generally, demand decreases as price increases and increases as price decreases, following the law of demand.

1. Price Demand (Price-Quantity Demand)

Price demand refers to the relationship between the price of a good and the quantity demanded by consumers. The demand for a product generally decreases as its price increases, and conversely, the demand increases when the price falls. This relationship is commonly represented by the demand curve, which is typically downward-sloping, reflecting the law of demand.

  • Example: If the price of coffee decreases, consumers may buy more coffee. However, if the price increases, fewer consumers might be willing or able to purchase the same amount of coffee.

2. Income Demand

Income demand refers to the effect of changes in a consumer’s income on the quantity of a good or service demanded. As a consumer’s income increases, they are generally able to buy more goods, leading to an increase in demand for normal goods. For inferior goods, however, an increase in income may lead to a decrease in demand, as consumers may switch to better alternatives.

  • Normal Goods: For example, as people’s incomes rise, they may demand more organic food or luxury items like branded clothing.
  • Inferior Goods: When incomes increase, people might buy less of cheaper alternatives, like instant noodles, and opt for more expensive food items instead.

3. Cross Demand (Cross-Price Demand)

Cross demand refers to the relationship between the demand for one good and the price of a related good. The relationship between the two goods can be either complementary or substitute:

  • Complementary Goods: If two goods are complementary, an increase in the price of one good will lead to a decrease in the demand for the other. For example, if the price of printers increases, the demand for printer ink may decrease because both are used together.
  • Substitute Goods: If two goods are substitutes, an increase in the price of one good will lead to an increase in the demand for the other. For example, if the price of tea rises, the demand for coffee may increase as consumers switch to a cheaper alternative.

4. Changes in Demand

Changes in demand refer to shifts in the demand curve, which are caused by factors other than the price of the good itself. A change in demand occurs when consumers buy a different quantity of the good at the same price, resulting in a shift in the entire demand curve.

Factors that Cause a Change in Demand:

  1. Change in Income: An increase in consumer income will increase the demand for normal goods, while the demand for inferior goods may decrease.
  2. Change in Consumer Preferences: If a good becomes more fashionable or desirable, demand may increase. For example, a surge in health awareness may increase the demand for organic food.
  3. Change in the Price of Related Goods:
    • Complementary Goods: If the price of a complementary good falls, the demand for the original good will increase. For example, if the price of smartphones decreases, demand for apps may increase.
    • Substitute Goods: If the price of a substitute rises, the demand for the original good may increase. For example, if the price of Coca-Cola rises, demand for Pepsi might increase.
  4. Changes in Consumer Expectations: If consumers expect prices to rise in the future, they may buy more now, increasing demand at present prices. Conversely, if they expect prices to fall, they may hold off purchasing, decreasing demand.
  5. Demographic Changes: An increase in population or changes in the demographic makeup of a region can affect demand. For example, an aging population may increase the demand for healthcare services and products.
  6. Government Policies: Policies such as taxes, subsidies, or regulations can affect demand. For example, subsidies on electric vehicles can increase their demand, while higher taxes on tobacco can decrease its demand.

Shift vs. Movement Along the Demand Curve:

  • A movement along the demand curve occurs when the price of the good itself changes, causing a change in the quantity demanded (either upward or downward along the curve).
  • A shift in the demand curve happens when factors other than price change (such as income, tastes, or the prices of related goods), resulting in an increase or decrease in demand at every price level.

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