Demand Theory
Demand theory is a principle that emphasizes the relationship between
consumer demand and the price for goods and services within a market. It
can also be illustrated as the demand curve which is downwards sloping in
a horizontal manner, as the price of the good decreases as quantity
increases. Vice-versa, where the price of the good increases as the quantity
decreases.
Ultimately, when applying the supply curve together, the equilibrium price
shifts accordingly. Essentially, demand theory highlights the consumer’s
perspective, while supply focuses on the business’s point of view.
Understanding Demand Theory
Demand is the quantity of a good or service the consumer is willing to
purchase at specific prices during a time period. The demand for a good at
a certain price generally reflects the consumer’s willingness to pay and
expectation for consuming that product. The goods indeed range in price,
from necessities to luxuries.
For example, regarding necessities, people need food, healthcare, clothing,
entertainment, shelter, and water across all welfares. The price of the goods
tends to be fairly affordable for most individuals. Whereas, designer bags,
for example, tend to be priced at a premium, as such goods are considered
wants and are not required to continue to live a healthy life.
The demand for a good or service is generally driven by two factors – utility
and ability to pay for the good or service.
The two aspects coincide with one another. Demand happens when
a goods or service yields some level of utility while being backed by the
ability, which ultimately provides satisfaction to the consumer.
Demand aims to convey how bad people wish to purchase specific goods,
along with how much is bought based on their income levels and utility.
Based on the satisfaction that the good provides, companies adjust their
supply level accordingly, which changes prices.
