Demand is the quantity of a good or a service that consumers are willing and able to purchase at various price points during a given period of time.
Demand is based on needs of a consumer and their ability to pay for it. If a consumer doesn’t want a product, then it has no effective demand.
When a consumers pay for goods or services, the total number of units purchased at that price is called the quantity demanded.
Elasticity of demand¶
Elasticity of a demand is an economic measure of change in demand relative to a change in another variable. The quantity demanded of a good or a service depends on factors such as price, income and preference.
Price elasticity of demand¶
When price of a product goes down, the quantity consumers buy will increase and vice versa. A good or service is elastic if the demand for that particular good or service is affected by price fluctuations.
An good example may be an apple. If the price of apples goes up, you most likely will think about switching to a different fruit like pears or peaches that is cheaper. The demand for apples will go down.
When a good or service is inelastic, this suggests that the demand for that particular good or service is insensitive to price fluctuations. An example of an inelastic good is petrol. Even if the price goes up, we will most likely keep buying them.
Businesses often strive to sell products or services that are inelastic in demand because doing so can mean that few customers will be lost if they raise prices.
Income elasticity of demand¶
The income elasticity of demand refers to the change in demand for a good relative to the change in income of consumers who buy this product, keeping all other factors constant. With income elasticity of demand, an individual can tell if a particular product is a necessity or a luxury.
Cross elasticity of demand¶
The cross elasticity of demand refers to the change in the quantity demanded of one good when the price for another good changes. For example, if in response to a 10% increase in the fuel price, the demand for new cars that are fuel efficient increased by 20%.