Samarkand iktisodiyot va servis instituti

Theory of demand

Economics is concerned with consumption and production. Another way of looking at this is in terms of demand and supply. In fact, the market forces – demand and supply, and the relationship between them lie at the very center of economics. We will start with the theory of demand and revise some of the material that we have had in Module 3.
Demand is the willingness and the ability of consumers to buy goods and services. In other words, demand is related to people’s unlimited wants and influences consumer’s decisions what, how much and at what price to buy. We have to distinguish consumer demand and market demand.
Consumer demand is the quantities of a particular good that an individual consumer wants and is able to buy as the price varies, if all other factors influencing demand are constant. These factors are prices of other goods, income, consumer tastes and preferences.

The law of demand

Consumer demand for a product is determined by its price. This relationship between the quantity demanded of a good and its price is called the law of demand: at low prices the demanded quantity will be higher. A price increase will result in a reduction in the quantity demanded. In other words, the higher the price, the lower the level of demand. Thus the sign of this relationship between the quantity demanded and its price is negative, and the demand curve slopes down from left to right.
Figure 7.1 Consumer demand.

A demand curve is constructed on the assumption that ‘other things remain equal’. The effect of a change in price is then simply illustrated by a movement along the demand curve (Figure 7.1). Demand and determinants other than price of a good

There are some factors influencing demand for a good, such as the prices of related goods (substitution effect), consumer incomes, and some others.
An increase in the price of a substitute good (or a decrease in the price of a complement good) will at the same time raise the demanded quantity.
As consumer income is increased, demand for a normal good will also increase but demand for an inferior good will decrease. A normal good is a good for which demand increases when incomes rise. An inferior good is a good for which demand falls when incomes rise.
What happens with the demand curve when one of other determinants (tastes, the number and the price of other goods, income, expectations of future price changes) does change? The answer is that we have to construct a new demand curve: the curve shifts. If one of the determinants (other than price) changes, e.g. income rises – the whole curve will shift to the right. This shows that at each price, more will be demanded than before. If a change in a determinant other than price causes demand to fall, the whole curve will shift to the left.
To distinguish between movements along and shifts in demand curves, it is usual to distinguish between a change in the quantity demanded and a change in demand. A movement along the demand curve as a result of a change in price is referred to as a change in quantity demanded (see Figure 7.1), whereas a shift in demand is referred to as a change in demand (see Figure 7.2).