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The law of demand states that at higher prices less will be demanded than at lower prices where there will be higher demand. This results in a negative correlation between the price of goods, and the quantity demanded as shown by a basic demand graph. 
When talking about demand, we only refer to effective demand which means demand that can be met by money, for example everyone might want an expensive car, but they probably can’t afford it, so this demand is ignored.

In micro-economics when talking about demand we mean demand for a certain product or market and not overall demand in an economy (this is aggregate demand which is explored in macro-economics).

Determinants of Demand

Price – this is obvious from the law of demand. The higher the price the lower demand and vice versa.

Real Income – is the actual income of a household after inflation has been taken into account. The higher ones incomes the more they should be able to afford ceteris paribus. Conversely the lower ones income the less they can afford to demand. Therefore if real incomes are high (when the economy is booming) then demand should also be higher.

The price of other goods – If a similar good (substitute) is cheaper then the demand for a more expensive similar good would fall and vice versa. If a good decreases in price we would expect its complimentary good (a good usually bought with another good, for example a DVD player and a DVD) to increase in demand.

Advertising – We would expect demand to increase if there has recently been a heavy advertising campaign.

Preferences - Your demand for a good may be low regardless of the price because you don't like or want the product. For example your demand for a certain car may be low despite its price being low for the sole reason that you may not like the colour.

Time - If you believe the product will be cheaper in a few weeks (or other time period) then your demand for the product may be low in the short run. Alternatively you may think that inflation will push prices up and so your demand for a product may be higher in the short run.

Credit - If credit is hard to obtain or too expensive then demand will be lower and vice versa, this is particularly the case for expensive items like cars and white-consumer goods.

Page last updated on 15/12/13