Theory of Demand

• Demand for a product is the quantity that purchases are willing and able to buy at a given price in each time period.
• What is Law of Demand?


  • The law of demand states that demand varies inversely with price.
  • A fall in market price causes an extension in demand.
  • A rise in market price causes a contraction in demand.
• Explaining downward sloping demand curve (1)


  • Substitution Effect: As the price of a product decreases, it becomes more attractive compared to other similar products. Consumers are more likely to switch to the cheaper option, leading to an increase in the quantity demanded.
  • Income Effect: When the price of a product falls, consumers effectively have more real purchasing power. This allows them to buy more of the product, which leads to an increase in the quantity demand. (More able)
• Explaining downward sloping demand curve (2)

  • Diminishing Marginal Utility: As people consume more of a particular product, the additional satisfaction or utility they derive from each additional unit starts to diminish. This means they are willing to pay less for each successive unit which contributes to the download - sloping demand curve. (More willing)
• Effective Demand


  • Effective Demand is demand for a good or service from consumers that is backed up with an ability to pay
• Potential (latent) Demand


  • Potential Demand is not yet expressed in the market - place because consumers do not have the ability to pay.
• Derived Demand


  • Derived Demand is the demand for a factor of production that is used to produce another good or service.
• Joint Demand


  • Joint Demand is when the demand for one product is directly and positively related to market demand for a related good or service.