THE CONCEPT OF DEMAND IN MICRO ECONOMICS
The concept of demand in microeconomics has evolved over time, with contributions from various economists. However, it is largely attributed to the foundational work of early economic thinkers during the classical and neoclassical periods.
Key Contributors to the Concept of Demand:
Adam Smith (1723-1790):
Often considered the father of modern economics, Adam Smith’s work laid the groundwork for understanding market behaviour, including demand. His seminal book, “The Wealth of Nations” (1776), discussed how the self-interest of individuals leads to the efficient allocation of resources, implicitly addressing the concepts of supply and demand.
David Ricardo (1772-1823):
Ricardo contributed to the classical theory of economics and expanded on the ideas of supply and demand. His work on value theory and distribution provided insights into how prices and quantities are determined in markets.
Antoine Augustin Cournot (1801-1877):
Cournot was one of the first to mathematically model the behaviour of firms in a market. In his book “Researches into the Mathematical Principles of the Theory of Wealth” (1838), he introduced the demand function and analyzed how prices and quantities interact in different market structures.
Alfred Marshall (1842-1924):
Marshall is often credited with formalizing the modern concept of demand in microeconomics. His book “Principles of Economics” (1890) introduced the demand curve and the idea of price elasticity of demand. Marshall’s work established many of the foundational principles of microeconomic theory, including the graphical representation of demand and supply curves.
Leon Walras (1834-1910):
Walras developed the concept of general equilibrium in his work “Elements of Pure Economics” (1874). He emphasized the interdependence of markets and the role of demand and supply in reaching equilibrium across the entire economy.
These economists collectively developed the theories and mathematical models that form the basis of the modern understanding of demand in microeconomics. While Adam Smith and David Ricardo laid the early foundations, it was Alfred Marshall’s formalization of the demand curve and price elasticity that solidified the concept as it is known today.
In microeconomics, “demand” refers to the quantity of a good or service that consumers are willing and able to purchase at various prices during a specific time period. Demand is a fundamental concept in economics that helps explain how markets operate and how prices are determined.
The major Key Concepts Related to Demand are :
Law of Demand: The law of demand states that, all else being equal, as the price of a good or service decreases, the quantity demanded increases, and vice versa. This inverse relationship between price and quantity demanded is often represented by a downward-sloping demand curve on a graph.
Demand Curve: A graphical representation of the relationship between the price of a good and the quantity demanded. The curve typically slopes downward from left to right, indicating that higher prices lead to lower quantities demanded.
Determinants of Demand: Several factors other than price can influence demand, including:
Income: An increase in consumers’ income generally increases demand for normal goods and decreases demand for inferior goods.
Tastes and Preferences: Changes in consumer preferences can increase or decrease demand.
Prices of Related Goods: The demand for a good can be affected by the prices of substitutes (goods that can replace each other) and complements (goods that are used together).
Expectations: If consumers expect prices to rise in the future, they may increase current demand.
Number of Buyers: An increase in the number of consumers in a market increases demand.
Movement vs. Shift in the Demand Curve:
Movement Along the Demand Curve: A change in the quantity demanded due to a change in the good’s own price, depicted as a movement from one point to another on the same demand curve.
Shift in the Demand Curve: When a non-price determinant of demand changes (such as income or preferences), the entire demand curve shifts to the right (increase in demand) or to the left (decrease in demand). Elasticity of Demand: Measures how responsive the quantity demanded is to a change in price.
Price Elasticity of Demand: The percentage change in quantity demanded divided by the percentage change in price. Demand is elastic if the elasticity is greater than 1, inelastic if less than 1, and unitary elastic if equal to 1.
Income Elasticity of Demand: The percentage change in quantity demanded divided by the percentage change in income. Cross-Price Elasticity of Demand: The percentage change in the quantity demanded of one good divided by the percentage change in the price of another good.
Consumer Surplus: The difference between what consumers are willing to pay for a good and what they actually pay. It represents the benefit consumers receive from purchasing a good at a price lower than their maximum willingness to pay.
Graphical Representation:
In a typical demand curve graph:
The vertical axis (Y-axis) represents the price of the good.
The horizontal axis (X-axis) represents the quantity demanded.
Let’s understand with an example :
Imagine the market for coffee. If the price of a cup of coffee drops from $5 to $3, the quantity of coffee demanded might increase from 100 cups to 150 cups per day. This scenario illustrates a movement along the demand curve. However, if there is an increase in consumer income and coffee is a normal good, the entire demand curve for coffee might shift to the right, indicating an increase in demand at all price levels.
Understanding demand is crucial for analyzing how markets function, setting prices, and making business decisions. It also plays a central role in formulating economic policies and understanding consumer behaviour. Hope you enjoy the facts about demand . thanks a lot
