Demand, or the law of demand, is the relationship between price and quantity demanded for a good or service in a market. The law of demand states there is an inverse relationship between price and quantity demanded; that is, the higher the price the lower the quantity demanded, and the lower the price, the higher the quantity demanded. A number of conditions are implicit in the analysis of demand. First, the market under consideration needs to be defined. For example does the term automobile market refer to the local, regional, national, or global market? Further, does it refer to the retail, wholesale, or manufacturing level? Demand relationships are usually studied with the assumption ceteris paribus (all other things being equal, or assuming nothing else has changed). A demand schedule or graph shows the relationship between price and quantity demanded in a market in a period of time, ceteris paribus. In most markets, businesspeople have the power to change prices. Consumers respond to the changing prices by changing the quantity they are willing and able to purchase. Price is the independent variable, and quantity demanded is the dependent variable. A change in price causes a change in quantity demanded. While a change in price causes a change in quantity demanded, other factors can cause a change in demand, which is a shift of the whole price/quantity relationship in a market. An increase in demand means that at every price, consumers are willing and able to purchase more of the good or service. Likewise, a decrease in demand means consumers are willing to purchase less of the good at each price. Economists have identified six factors that can cause a change in demand:
• tastes and preferences
• INCOME
• price of compliments and substitutes
• expectations
• number of consumers
• EXCHANGE RATES
It is easy to envision how changing tastes and preferences affect demand in a market. Consider what were the most popular gift products in past holiday seasons. Some years it was a stuffed animal, other years a new electronic game. When PRODUCTs are “hot,” they experience an increase in demand. Products that are no longer fashionable and those that receive unfavorable publicity experience a decrease in demand. Income can affect market demand in two ways. Most often an increase in consumers’ income increases demand for goods and services; if we have more money, we spend more. American business managers know that the demand for expensive products, automobiles, appliances, and electronic equipment is sensitive to changes in income. Automobile manufacturers consider changes in income when planning production levels. For some products, called economically inferior goods, as income increases, demand decreases. As an example, if someone wins the lottery, what would that person buy less of? College students often respond fast food, instant noodles, and used cars. A shrewd manager of an automobile repair business once observed that his business prospered during downturns in the economy. He recognized that when peoples’ incomes decreased, they held on to their cars longer, creating an increase in demand for repair services. The prices of complementary goods and substitute goods affect the demand for a product. For example, if the price of hot dogs increases, it would cause a decrease in the quantity of hot dogs demanded. This would cause a decrease in demand for hot-dog rolls. Business managers keep track of the prices of complementary products affecting the demand for their products. Similarly, managers monitor the prices of substitute products. Chicken producers know an increase in the price of beef products will increase demand for their products. Economists have observed that consumer expectations affect demand for some goods and services. While most consumers will purchase basic goods and necessities without considering changing ECONOMIC CONDITIONS, the demand for home purchases, automobiles, and other significant purchases are affected by consumers’ comfort and security about the future. The University of Michigan Survey of Consumer Expectations is a widely studied and quoted index of American consumers’ attitudes. Logically, the more consumers in a market, the greater the demand for most goods and services. Back in the 1950s, Aiken, South Carolina, then a town of 5,000 people, suddenly had an influx of 30,000 workers constructing the Savannah River Site Nuclear Weapons facility. The huge increase in number of consumers overwhelmed local markets. Landlords rented the same bed to two people, one working the day shift, the other working the night shift. Local grocery stores put canned goods out in boxes, never stacking the shelves. There were so many new customers, they opened and emptied the boxes themselves. Midwestern oil towns experienced the same boom, but it declined in the 1980s when low oil prices sent workers elsewhere. Changes in exchange rates can increase or decrease demand for a product. DEPRECIATION of the Japanese yen makes products from Japan cheaper for American consumers, increasing this demand and decreasing demand for substitute products made by American businesses. Similarly, appreciation of the U.S. dollar increases demand for foreign products and decreases foreign demand for U.S. products. While only a price change causes a change in quantity demanded, the above examples were changes in demand for a product.