Introduction To Demand

I'm pretty sure that most of us knows what 'demand' is, therefore I will not go much into details of the long and tiring explanations given by textbooks. So everyone has our own needs and wishes to afford something. Etc. food, clothing, home. Basically in economics, demand means the quantity of an item which is desired by a person while quantity demanded is the amount which the person is willing, and at the same instance, afford to buy it in a given time period. The table below shows the common relationship between the price of a good and the quantity demanded by consumers ( in a free market ).

The price-demand relationship

As shown in the diagram, the common demand curve shows an inverse relationship between price and its quantity demanded. This is true according to the Law of Demand ( states that the quantity demanded lowers as price increases, all others being equal ). Mainly because of  2 reasons ; the substitution effect and the income effect.

Substitution effect :

 In classical economics, we commonly assume that all humans are rational and will try to maximize our satisfaction* [utility]. To illustrate this, let's say you are given choices between two vegetables, the carrot and the cabbage, and say that both of them will give you the same amount of satisfaction (per kilo). 

If the carrot is originally priced at $1 but later on increased to $1.50, which product will a rational man buy? If that man had been buying carrot all along, then now he would substitute carrot with cabbage because it is more worthy to do so at a given fixed income. Therefore, as the price of a product is increased, people will demand less of a product, substituted by another product. This is given that that particular product has fair / close substitute. The recent rise in the price of sugar ( up roughly 30cent ) due to subsidy rationalization in Malaysia did less to reduce its demand as sugar unlike most commodities has very less substitutes ( expensive artificial sugar eg. aspartame ) We will discuss the responsiveness [elasticity] of consumers to the price in the coming posts.

Income effect :

According to 2012 labour force survey of Malaysia, there is a roughly a total of 20mil working labour. Of these working labours, mainly are employed at a fixed rate of wage thus most of us have a limited disposable income to spend on goods and services per month. Therefore, we make choices everyday to fully make use of our hard earned money. As a product got more expensive than before, consumers will cut back on its consumption because they cannot afford to buy the same amount since there is no increase in wages. With only $10 to spend  on vegetables, will you be able to buy 10 carrots as you did before the price hike?

Both of these effects cause the quantity demanded by consumers to fall as price increases. But there are circumstances which the demand curve shows a positive relation between price and quantity demanded which violates the Law of Demand.

Such goods, which are rather rare, are called Veblen goods ( Named after US economist Thorstein Veblen ). These goods are mainly driven by psychological factors such as fear and status-seeking. Another example of goods which follow such demand curve would be Giffen goods ( Named  after Scottish economist Sir Robert Giffen ). However there are considerable debates on its existence. I too shall cover these topics in coming posts.

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The topic 'Demand' is a very large chapter , and it will be a few posts before I can cover most of it. Do subscribe and  look forward to future posts. To be honest, microeconomics is not my strong point but it is very interesting. Anyway, thanks for reading and again feel free to to comment to add or to point out any mistakes. 

Updated :

Today , I went to an incredibly big book sale called 'The Big Bad Wolf' , in Mines Convention Centre.

As you can see the numbers of people there, sales are great! The main reason why is there such huge crowd is that all books were priced at 75-90% discount ( very worthy indeed even though they are not newly published, I bought only 4 books ). Explained earlier, a very low price ( relatively ) will indeed attract huge demand for it.