Introduction to Demand

Demand is one of the most fundamental concepts in the economics discipline. Simply stated, demand is description of the customers' level of desire for purchase. Demand can be affected by a variety of factors. One typical example of how demand is affected is price. To apply an example, let us use a product called widgets. When widgets have a low price then more customers will desire to purchase this product, thus increasing the demand of widgets. When the price of widgets is up, then less customers are willing to purchase this product,  hence demand decreases. The increase and decrease of the level of desire by the customer, based on the fluctuation of the price, is the basis for the law of demand.

Demand has other effects as well. When demand is low for one product, then it typically is strengthened for another product. This scenario is called the substitution effect. To put it in other words, if you choose not to buy something because of its high price, then you substitute another option, because it is cheaper, in its place. For example, if Pepsi were six dollars a liter you would not demand to purchase it at that price. You are still thirsty however. Thus, you reach for a Coke that is more moderately priced at 2 dollars a liter. In this example you substituted the Coke for the Pepsi because of your level of demand in relation to the price of the sodas.

Another effect from demand is called the income effect. When the price of goods or services increases then you feel that you are losing more money to purchase the same thing. As a result, you choose not to purchase the increased priced goods or services, which as a consequence, leaves additional money in your pocket. When demand is low, money remains in the pocket of the customer.