What is Demand Analysis? Definition and Meaning!
Demand is the amount of goods that consumers or buyers are willing and capable to buy at a specific price in a specific time period while everything else remains the same. Demand is an economic principle that describes the willingness and desire of consumers to purchase specific goods or services at a specific ceteris paribus.
Law of Demand:The Law of Demand describes the inverse relationship of price and the quantity demanded, all else remaining constant. If the price is high, the quantity demand decreases and if the price decreases, then the quantity demand will increase.
Substitution Effect:In substitution effect, when the price of a good or product decreases, the relative price of that product makes the buyer more eager to buy that good or product. When the price of a good increases, the relative price of that good makes the buyer less eager to buy that good or product. The price of one product is contrasted with the prices of other products, thus causing the substitution effect. Consumers usually substitute towards the cheap or less expensive product.
Income Effect:Income can be measured in terms of the services and goods that one can purchase. If the price of goods and services decreases and nominal income remains constant, real income increases. In this way, when one can buy goods at the cheapest rate, then one’s income goes furthest and thus increases in real terms.
Change in Consumer Income:Changes in consumer income causes demand to fluctuate on par to the change in one’s income. If income increases, demand for normal goods will increase. If income decreases, demand for normal goods will decrease. Contrary to that, if income increases, demand for inferior goods decreases and if the income decreases, the demand for inferior goods will increase.
Change in Related Goods Price:Price change in one good can change the demand of other related goods. For example, if the price of one good is increased, more consumers will buy the other relative good and if the price of the first good decreases, more consumers will buy it.
Change in Consumer Expectations:Any change in consumer expectations affects demand. If a consumer expects his or her income to rise in the future, the existing demand will increase and if the consumer expects his or her income to reduce in the future, the existing demand will decrease accordingly.