A market exists wherever there are buyers and sellers of a particular good. Buyers demand goods from the market whilst sellers supply goods to the market.
Demand is the quantity of goods or services that will be bought at any given price over a period of time. E.g., approximately 2 million new cars are bought each year in the UK today at an average price of £8,000 would be 2 million units.
- Demand and Price
If everything else was to remain the same (ceteris paribus), what would happen to the quantity demanded of a product as its price changed? If the average price of a car were to fall from £8,000 to £4,000, then it is not difficult to guess that the quantity demanded of cars would rise. On the other hand, if the average price were £35,000 very few cars would be sold.
The demand curve shows effective demand. It shows how much would be bought at any given price and not how much buyers would like to buy if they had unlimited resources.
- Demand and Income
Demand for a normal good rises when income rises, e.g., a rise in income leads consumers to buy more cars. A few goods, known as inferior goods, fall in demand when incomes rise.
A rise in income will lead to an increase in demand for a normal good such as clothes. An increase in demand is shown by a shift in the demand curve.
- The Price of Other Goods
Another important factor which influences the demand for a good is the price of other goods, e.g., in the great drought of 1976 in the UK, the price of potatoes soared. Consumers reacted by buying fewer potatoes and replacing them in their diet by eating more bread, pasta and rice.
Not all changes in prices will affect the demand for a particular good. A rise in the price of tennis balls is…