CHP 5:Changes in Demand

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What is demand?

Demand is defined as want or willingness of consumers to buy goods and services. In economics willingness to buy goods and services should be accompanied by the ability to buy (purchasing power) and is referred to as effective demand.

Law of demand

It states that when price increases, the amount demanded will fall and when prices fall, the amount demanded will rise.
This phenomenon when plotted on a graph is known as Demand Curve.


Movement along the demand Curve

Extension of demand

Extension of demand is the increase in demand due to the fall in price, all other factors remaining constant.

Contraction of demand

Contraction of demand is the fall in demand due to the rise in price, all other factors remaining constant.


Factors affecting demand

Change in people’s income: More the people earn the more they will spend and thus the demand will rise. A fall in income will see a fall in demand.

Changes in population: An increase in population will result in a rise in demand and vice versa.

Change in fashion and taste: Commodities or which the fashion is out are less in demand as compared to commodities which are in fashion. In the same way, change in taste of people affects the demand of a commodity.

Changes in Income Tax: An increase in income tax will see a fall in demand as people will have less money left in their pockets to spend whereas a decrease in income tax will result in increase of demand for products and services because people now have more disposable income.

Change in prices of Substitute goods: Substitute goods or services are those which can replace the want of another good or service. For example margarine is a substitute for butter. Thus a rise in butter prices will see a rise in demand for margarine and vice versa.

Change in price of Complementary goods: Complementary goods or services are demanded along with other goods and services or jointly demanded with other goods or services. Demand for cars is affected the change in price of petrol. Same way, demand for DVD players will rise if the prices of DVDs’ fall.

Advertising: A successful advertising campaign may affect the demand for a product or service.

Climate: Changes in climate affects the demand for certain goods and services.

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