Demand Factors and Law of Demand Essay
Introduction, the law of demand, factors affecting the demand of commodities, conclusion of law of demand.
People often exercise choice because human wants are infinite while the resources available are scarce. For the satisfaction of human wants to occur, there must be a relationship between the production of commodities and their corresponding pricing system. In the market, the forces of demand and supply determine the prices of goods and services.
At the same time, the prices of goods and services affects demand and supply (Suri, 2011). In ordinary terms, demand refers to desire or urge of purchasing commodities. In economic terms however, demand is something beyond a plain desire. Demand in this sense represents a want supported by the power or capability to purchase.
The law of demand asserts that all other factors kept constant, the price and quantity demanded are inversely proportional. For instance, a company selling snacks may sell approximately 100,000 cookies at $1 each. If the company decreases the price of its cookies to $0.75 each, the number of cookies sold may increase to 115,000.
On the other hand, if the company decides to increase the price per cookies to $1.25, the number of cookies sold may reduce to approximately 85,000. This can only apply when all other factors like customer preference are constant (Saint-Leger, 2011).
In this regard, there are various assumptions made in relation to the law of demand for the establishment of the price-demand relationship. These assumptions include assuming that the income of consumers does not change, there are no changes in preferences and tastes of consumers, prices of other goods remain constant and there are no changes in the size and composition of the consumer population (Akrani, 2009).
A demand curve clearly represents the effect of price on the quantity of goods and services demanded. In the demand curve, the quantity demanded lies on the horizontal axis while the price lies on the vertical axis. Any change in the price causes a shift along the demand curve. However, there are other factors that can cause a shift in the demand curve other than price. These may include price alterations for complement goods, consumer demand for alternate goods and customer preferences (Saint-Leger, 2011).
Even though it is evident that quantity demanded changes as price of commodities changes, such a change varies from commodity to commodity. This means that the amount of change is not constant for all commodities.
In this case, some goods and services respond more to changes in price while others respond less. Elasticity of demand explains the extent of the responsiveness of quantity demanded in relation to changes in price. This means that the elasticity of demand explains further the relationship of price and demand (Akrani, 2009).
There are various factors that affect the demand of goods and services. The major factor is price of goods and services. In most cases, the quantity of a product purchased by a customer depends on the price of that particular commodity. In this case, people are less willing to purchase a commodity when the price of such a commodity increases. On the other hand, customers will purchase a certain commodity in large volumes if the price of the commodity reduces (Sothern, 2011).
Another factor that influences the demand of commodities is of the size of the income of customers. In general, consumers will buy more when their income increases and buy less when their income reduces. As the income of some people increase, their consumption increase causing an increase in the demand for various commodities. For the goods which are superior and of good quality, the increase in income causes increase in their demand. On the other hand, demand for inferior goods reduces with increase in income levels (Suri, 2011).
The number of buyers at a specific time also influences the demand for goods and services. For instance, the demand for stationery increases during the periods when the schools are opening. In addition, there is an increased demand for clothes and playing dolls for children during the holidays especially the Christmas period. The demand for these goods however reduces when the holidays are over (Sothern, 2011).
The black Friday is a very important day in America, which influences the demand for commodities. Economists site this day as the most important day of the year for the economy of United States. During this day, Americans flock in the shopping malls to purchase items and commodities for the Christmas celebrations.
During this time, the demand for various commodities like electronics, children playing items and clothes increase heavily. In addition, most traders reduce the prices of some commodities during this day causing the demand to increase further. According a survey by the National Retail Federation (NRF), some 152 million people purchase heavily discounted commodities during this day (Washington, 2011).
The law of demand is an important concept in economics. It explains the relationship between the quantity of goods and services demanded and other factors including price, preferences, income and number of buyers. Business owners and companies should take time to understand the law of demand and comprehend the various factors that may increase demand for their products.
This will help them to maximize their sales since they will perfectly understand the market during specific periods. The understanding of the law of demand is also useful in determining the quantity of supply needed for a particular commodity.
Akrani, G. (2009). Demand in Economics: Law of Demand and Elasticity of Demand . Web.
Saint-Leger, R. (2011). The Determinants of Demand That Will Shift the Demand Curve . Web.
Sothern, M. (2011). What Are the Factors Affecting Demand Economics? Web.
Suri, S. (2011). Seven Factors that influences the Demand for a Commodity . Web.
Washington, J. S. (2011). Black Friday: Most important day of the year for the US economy . Web.
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The well-known "law of supply and demand" says that an increase in the price of a commodity leads to a decrease in the aggregate demand for this commodity and an increase in aggregate supply. There is, however, no theoretical foundation for this "law". Empirical evidence, on the other hand, should be interpreted with care. If one estimates the parameters of certain functional forms for demand and supply functions, then the results may simply be consequences of the parametric assumptions made in estimation. The first chapter of the thesis discusses the implications of the assumption of profit and utility maximisation for the properties of demand and supply functions. It explains why economic rationality on the microlevel does not, in general, lead to macroeconomic regularities and suggests replacing the consumption sector of the neoclassical equilibrium model by a large population of individually small consumers. Such a population will be explored in the second chapter. The chapter is a direct outgrowth of a basic contribution by W. Hildenbrand: "On the Law of Demand", Econometrica 1983. In W. Hildenbrand's model the market demand function is defined by integrating an individual demand function with respect to an exogenously given income distribution. We build into the model an individual labour supply function and then compare the matrix of aggregate income effects studied by W. Hildenbrand with that obtained by integrating the individual demand function with respect to a distribution of wage rates. The empirical part of the thesis analyses the labour supply and earnings data in the U.K. Family Expenditure Survey 1970-85. Using non- parametric smoothing methods, the elasticity of labour supply with respect to the wage rate is estimated for several groups of workers. The estimations for full-time workers confirm the famous "downward sloping" labour supply function. The estimated elasticities for the entire population of workers for the years 1970-85 have the mean value 0.2 and the standard deviation 0.02.
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