Throughout the years, goods and services have been exchanged in market with means of currency, things, and by all kinds of in ways. In order to measure the relationship between two or more items economist has introduced mechanism so called “demand curve and supply curve” to the market.
However this article will discuss mainly on meaning of law of demand curve in terms of economics and characteristics of individual and market demand. Also, five main determinants that play an important role to shift demand curves, such as :
- price of related goods and services
- income of the buyers
- number of buyers
- buyers tastes or preference
- buyers expectation.
Let’s look at Law of demand curve definition first-
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Law of demand curve definition
Law of demand states that the quantity of good and services will go down whereas its’ price will go up. Similarly, if the price of good and service increase, its’ quantity will decrease.
Individual demand study about each individual person of purchasing behavior depending on price range.
For example, Ms. Ellen purchases four shoes during Christmas’ sales while price per shoes is $10. However, Ms. Ellen decide to purchase only two pairs while price per pair is going up to $20.
Market demand is used to analyse about group of people, community, generation, country, etc. Also summation of individuals demand curve in a particular market.
Exhibit a. Market demand schedule for coffee in Brazil
|Price (per kg)||Quantity Demand (per year)|
The above market demand table shows that the buyers in the market able to buy different amount at various price range. At $1 per kg, the amount collectively demanded would be 10,000 kgs per year. When the price up to $4 per kg, the quantity demand will reduce to 3,000 kgs per year.
Demand curve graph
Exhibit b. Demand Curve
Demand curve is downward sloping with quantity of demanded (Qd) on horizontal axis and price (P) on vertical axis.
Five factors why demand curve shifts
Believe that we have a clear picture on characteristics and elements of demand curve. Let’s move on to study about five main factors which has an ability to shift demand curve.
First of all, when we look into the factors that has impact on demand curve apart of product price is its substitute good and complement good.
Substitutes are goods that can be replaced with one another. Substitutes would include bus ticket and air ticket, Adidas and Nike, printed book and e-book.
Increase in price of one good will lead a buyer willingness to buy substitutes more and thus will increase quantity demand of substitutes. Also, decrease in price of one good will influence a buyer to buy substitutes less and will decrease quantity demand of substitutes.
Complements are goods that supposed to use together or enhance usefulness of each other. For instance, printer and ink, rackets and balls, golf ball and golf club, etc.
Unlike substitutes, complements good has a negative relationship between price of one good with its complements good demand. Rising a price of one good will eventually decrease quantity demand of complements, whereas, falling a price of one good will increase quantity demand of complements.
Changes in income
Another straight forward factor is the income of buyers. The better income they earned, the more spending they will make and eventually quantity of demand will increase.
When we look into details, there are two types of good in general so called a normal good and an inferior good.
Normal goods are branded items, luxury car, foreign vacation, etc. Demand for normal good tends to be rise when income increase and go down when income decrease. There is a positive relationship between normal goods and demand curve.
Whereas, inferior goods are second hand clothes, used car, domestic vacation, etc. If people’s income fall, they will save money by choosing inferior good over normal good.
Demand for inferior good will go up when people earned less and will go down when people earned more. Therefore, there is a negative relationship between inferior goods and demand curve.
Changes in the number of buyers
The bigger market size will lead to the greater need of demand. For example, the world population are increasing year by year, demand for vital intake in daily diet such as wheat and rice also increasing.
So, demand for a good or service is directly related with market size and potential buyers population
Changes in tastes
Another determinants that has impact on demand of good and service is changes in buyers’ tastes or preference.
Changes in tastes can be influenced by lifestyle, occupation, weather, trend and even public figure. For example, a super model Kylie Jenner has launched a cosmetic and clothing line. It achieves a great success, thanks to her fans and followers.
In this era, business owners are using public figures to advertise their product to increase demand by influencing buyers’ tastes.
Changes in expectations
Lastly, the demand for a good or service will vary with changes in expectations as well. For instance, weather forecast to have hurricane in next month, demand of rice, water bottle and other basic essential things will rise in the moment.
If people expect the future price of particular good is likely to increase, they will buy and stored now. Also people will decide not to rush to buy good that expected to fall price in the future.