Law of Demand: Increase & Decrease in Demand
The Law of Demand states that, all else being equal, the quantity demanded of a good or service decreases as its price increases and vice versa. This inverse relationship between price and quantity demanded is a fundamental principle in economics. However, demand can change due to factors other than price, leading to shifts in the demand curve. Let’s explore the concepts of increase in demand and decrease in demand in detail.
1. Increase in Demand
An increase in demand occurs when consumers are willing to purchase more of a good or service at the same price. This is represented by a rightward shift in the demand curve.
Causes of Increase in Demand:
Rise in Consumer Income: Higher income levels enable consumers to afford more goods and services, increasing demand for normal goods.
Change in Consumer Preferences: Favorable changes in tastes or preferences boost demand for specific products.
Population Growth: An increase in population size leads to higher overall demand for goods and services.
Expectations of Future Price Increases: If consumers anticipate prices will rise in the future, they may buy more now, increasing current demand.
Substitute Price Increase: When the price of a substitute product rises, demand for the alternative good increases.
Complementary Goods’ Price Drop: A decrease in the price of complementary goods makes the associated product more desirable.
Example: A rise in demand for electric vehicles as consumers become environmentally conscious and governments offer subsidies.
2. Decrease in Demand
A decrease in demand occurs when consumers are willing to purchase less of a good or service at the same price. This is represented by a leftward shift in the demand curve.
Causes of Decrease in Demand:
Decline in Consumer Income: Reduced income lowers the purchasing power, especially for non-essential or luxury goods.
Change in Consumer Preferences: A shift in tastes away from a product reduces its demand.
Population Decline: A shrinking population leads to reduced overall demand for goods and services.
Expectations of Future Price Drops: If consumers expect prices to fall, they may delay purchases, reducing current demand.
Substitute Price Decrease: A drop in the price of substitute products can reduce demand for the original product.
Complementary Goods’ Price Increase: When the price of a complementary product rises, it discourages the purchase of the associated good.
Example: A decrease in demand for traditional diesel cars as consumers shift towards electric or hybrid vehicles.
Difference Between Change in Quantity Demanded and Change in Demand
Change in Quantity Demanded: Refers to movement along the demand curve due to price changes, keeping all other factors constant.
Change in Demand: Refers to shifts in the entire demand curve caused by non-price factors like income, preferences, and expectations.
Understanding the dynamics of increases and decreases in demand helps businesses, policymakers, and economists predict market trends and design effective strategies.
