Study Room - EXTERNAL INFLUENCES

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Demand

	The Nature of Demand

	The Demand Curve

	Determinants of Demand

	Movement and Shift

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	Demand Test
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	AS, Edexcel, Spec 2000

	AS, Edexcel, Spec 2000

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	AVCE, Edexcel, Spec 2000

	AS, OCR, Spec 2000

The Nature of Demand

Within economics we define the level of demand for a product or service, as the quantity of the good consumers in the market are willing and able to purchase.

The quantity of a good the consumer is able to buy, will depend on their income, and hence purchasing power, and we call this the income effect.

Whilst the quantity of a good the same consumer is willing to buy, will depend on its attractiveness in comparison to alternative goods/ substitute goods, which we call substitute effect.

Demand for Diamond Rings

Let's consider the following example, the level of demand in the market for diamond rings is dependent on the consumers in that market being both willing and able to purchase the product. Many consumers may be willing to buy the product, as they find the idea of owning a diamond ring attractive. However, due to their level of income / purchasing power, they are not able to buy such an item. Another group of consumers with higher income levels may be able to buy the item, but are not willing to do so as they prefer a substitute good, an alternative piece of jewelry - a platinum ring for example. Finally, there will be consumers who are both willing and able to purchase a diamond ring and shall do so, creating a level of demand for the product in the market.

Demand & Price

Given the above example, how would a change in the price of diamond rings effect demand in the market ?

The Law of Demand

The Law of Demand states that when the price of a good rises, the level of demand for that good will fall : As less people are now able to buy the good based on their income - Income Effect. As more people switch to substitute goods which now may appear more attractive given their relative price - Substitution Effect and when the price falls, demand for that good will rise : As more people are now able to buy the good based on their income - Income Effect As more people switch from substitute goods now may appear less attractive given their relative price - Substitution Effect

Ceteris paribus - other things being equal

There is an assumption made within the above law, as with all of the economic theory we will consider, and that is that all other factors which could have influenced the consumer remain unchanged. For example, if the price of platinum rings had fallen even further than that of diamond rings, demand may well have fallen for our product even after lowering its price, given the greater drop in price of the substitute good. Or if income levels had risen, at the same time as we increased the price of diamond rings, demand may not have been effected at all.

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