The Law of Demand- Supply & Demand Continued

The law of demand is the other contributing factor to the price system in the market economy. Demand represents the quantity of a good or service desired by consumers in the marketplace. The quantity demanded at any given point along the demand curve is the amount of a good consumers are willing to buy at a given price. Exactly as seen with supply, demand is situated on an x-axis that represents quantities and a y-axis that represents prices. While the supply curve focuses on sellers and producer surplus, demand evaluates consumer surplus. Consumer surplus is the difference between a given point on the demand curve (the consumer's willingness to pay) and the price of the good. An example of consumer surplus would be a family looking to purchase a new kitchen table with $500. The family enters the store and the going rate for the kitchen table is only $300. The price that the family was willing to pay was $200 more than what they actually spent, also known as $200 of consumer surplus. The relationship between quantity and price for demand is as follows:

• An increase in price results in a decrease in quantity demanded
• A decrease in price results in an increase in quantity demanded
• Demand curves are always downward sloping as a result of the quantity and price relationship

Along any given demand curve, a change in price yields a different quantity demanded. While quantity demanded may increase or decrease as a result of price changes, the entire demand curve can actually shift. Just as supply can increase or decrease, demand can as well. An increase in demand shifts the curve to the right of the original curve and a decrease in demand shifts demand to the left.

An increase in demand causes:

• The same quantities demanded at a higher price
• Higher quantities demanded at the same price

A decrease in demand causes:

• The same quantities demanded at a lower price
• Lower quantities demanded at the same price

There are numerous factors that can attribute to an increase or decrease in demand. Some of these factors are:

• Income: With an increase in income, comes an increase in demand. This holds true for what economists refer to as normal goods. Most goods such as cars, appliances, and luxuries are normal goods. Sometimes, a decrease in incomes comes with an increase in demand for goods. These goods are called inferior goods. An inferior good would be something like fast food, an item people may consume more of during an economic downturn. 
• Number of buyers: The entry of more consumers in the market for a good increases demand just as the exit of buyers in a market for a product decreases demand.
• Prices of Substitutes: Suppose that both Coke and Pepsi are perfect substitutes. If Coke was to go on sale, the demand for Pepsi would decrease. Generally, the decrease in price of a substitute results in a decrease in demand for the other good.
• Prices of Complements: Things that go well together are considered to be complimentary goods. Shampoo and body wash would be an example of compliments. If the price of shampoo decreases more people will buy shampoo, but more people will also buy more body wash. The general rule for the price of compliments is that a decrease in the price of a good will increase the demand for its compliment.