Demand is a monetary form of expressing a need, i.e. it is the amount of goods and services that buyers are willing and able to (willingly) buy at some price over a period of time. The amount of demand depends on various factors: prices for goods, incomes and tastes of buyers, the number of buyers, etc. One of the main factors is the price. The maximum price for which buyers are ready to buy a unit of goods at the moment is the demand price. The relationship between the price of a good and the volume of consumer demand for that good reflects the law of demand, the essence of which is that the higher the price of the good, the fewer buyers willing to buy it, and the lower the demand. Conversely, all other things being equal, a decrease in price leads to a corresponding increase in the amount of demand. Consequently, there is a negative, or inverse, relationship between price and demand.
This dependence can be explained by the following reasons:
1. A high price discourages consumers from buying a product, and a low one increases the number of buyers and the number of purchases, which means an increase in demand.
2. Consumption is subject to the principle of diminishing marginal utility, according to which subsequent units of a given product bring less and less satisfaction, and therefore consumers buy additional units of output only if its price decreases.
3. The law of demand can be explained by the effects of income and substitution. The “income effect” indicates that at a lower price, a person can afford to buy more of a given product without denying himself the purchase of any alternative goods.
The “substitution effect” is expressed in the fact that the buyer seeks to purchase a cheaper product instead of a similar product, the price of which has remained the same, i.e. to replace expensive products with cheaper ones.
The relationship between the price of a product and the volume (value) of demand can be expressed in tabular form in the form of a demand scale or depicted as a downward curve on a graph (Fig. 8.1).
The change in the volume (value) of demand with a change in the price of goods means movement from one point to another on a constant demand curve.
At the same time, demand is influenced by other factors:
1. Changing tastes of customers (physical health is becoming more popular, and this increases the demand for sneakers and bicycles).
2. Change in the number of buyers (a decrease in the birth rate reduces the demand for baby food).
3. Change in income (increased income increases the demand for meat, fruits and reduces the demand for potatoes, bread, etc.).
4. Changes in prices for related goods (reduction of tariffs for passenger air transportation reduces the demand for bus travel).
5. Changes in consumer expectations (assuming that purchases of imported sugar will decrease, and this will cause an increase in prices for it, the population expands the current demand for sugar).
6. Changes in the economic policy of the state (a decrease in tax rates leads to an increase in consumer incomes, and, consequently, to an increase in demand).
A change in one or more of these factors causes a change in demand: as demand increases, the demand curve shifts to the right upwards, and the decrease to the left downwards.
Thus, the law of demand is one of the greatest laws of the market economy, because it gives the behavior of buyers and sellers an objective economic logic, and this makes it possible to predict their reaction to price changes.
However, in practice, there are situations that seem to be an exception to the law of demand. For example, when:
with an increase in prices for essential goods (bread, salt, potatoes, meat, etc.), the demand for them continues to grow. But in this case, the increase in the price of products shows the emerging trend of price increases in the future. Buyers, expecting an even greater increase in prices, are expanding the purchase of these goods today. This is the so-called “Giffen effect” (after the English economist); with a decrease in prices for high-quality luxury goods, the demand for them does not grow, but decreases. It turns out that these goods are bought not only for the sake of their consumer properties, but sometimes to emphasize their high social status, and therefore lowering the price reduces their attractiveness and demand for them. This is the so-called “Veblen effect” (after the American economist); in the short term, with the increase in the price of goods, the volume of demand for it also increases. This is where the mechanism of consumer expectations works. Therefore, buyers are not inclined to reduce purchases when the price increases, if they expect a new price increase in the near future.
The change in the amount of demand under the influence of price dynamics is characterized by an indicator of the elasticity of demand by price (Fig. 8.2).
Depending on the degree of elasticity, the demand curves will have a different configuration, as can be seen in Figure 8.3.
Demand elasticity tends to be high at high prices, and when prices fall, it decreases and may disappear altogether if the price drop is so severe that the level of demand saturation is reached.
The dynamics of demand for a particular product with a constant income can also be affected by changes in prices for other goods. The strength of such an impact is determined by the cross coefficient of elasticity of demand for price. It shows how much percent the demand for product X will change with one percent fluctuations in the price of goods U:
C.E.S.C. = change in demand (in %) : price change (in %)
The value of this coefficient depends on the relationship in which the goods are located to each other. They can be interrelated (K.el.s.hu > 0), complementary (K.el.s.hu < 0) and neutral (K.el.s.hu = 0).
Demand is also influenced by the buyer’s income. Quantitatively, the relationship between income and demand reflects the coefficient of elasticity of demand for income, which shows what will happen to demand with a one percent change in income.
C.E.S.D. = change in demand volume (in%) : change in income (in%)
If this coefficient is negative, then the goods are called substandard, and if the value is positive, then the goods are normal. Goods can be classified as essentials when 0 < K.el.s.d < 1; the second need, when K.el.s.d. = 1 and to luxury goods, when K.el.s.d. > 1.