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2019.01.25

In economics, demand implies something slightly different from the common meaning of the term. The layman, for example, uses the term to mean the amount that is demanded of an item. Thus if the price were to decrease and individuals wanted more of the item, it is commonly said that demand increases. To an economist, demand is a relationship between a series of prices and a series of corresponding quantities that are demanded at these prices. If one reads the previous sentences carefully, it should become apparent that there is a distinction between the quantity demanded and the demand. This distinction is often a point of confusion and we all should be aware of and understand the difference between these two terms. Indeed we repeat that demand is a relationship between price and quantities demanded, and therefore suggests the effect of one (e.g., price) on the other (e.g., quantity demanded). Therefore, knowledge of the demand for a product enables one to predict how much more of a good will be purchased if price decreases. But the increase in quantity demanded does not mean demand has increased, since the relationship between price and quantity demanded (i.e., the demand for the product) has not changed. Demand shifts when there is a change in income, expectations, taste, etc., such that a different quantity of the good is demanded at the same price. In almost all cases, a consumer wants more of an item if the price decreases. This relationship between price and quantity demanded is so strong that it is referred to as the “law of demand.” This law can be explained by the income and substitution effects. The income effect occurs when price increases reduce the purchasing power of the individual and, thus, the quantity demanded of goods must decrease. The substitution effect reflects the consumer's desire to get the “best buy.” If the price of good A increases, the individual will tend to substitute another good and purchase less of good A.

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