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Law of Demand

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What is demand?

Demand is comprised of three things.

Ability to pay
Willingness to pay
It is not enough to merely want or desire an item. One must show the ability to pay and then the willingness to pay. If all three conditions are not me then the demand is not real. This, by the way, is the purpose of advertising. While many may want a product it is quite another to be willing to pay. Advertising attempts to move a consumer from mere want to action. These day even condition two may not stand in the way of a consumer. With the advent of credit cards we are able to purchase products without the current ability to pay. Many stores and car dealers even offer on the spot credit though the interest rate may be quite high.

What factors alter your desire, willingness and ability to pay for products? Some factors include consumer income, consumer tastes the prices of related products like substitutes for that product of items that may complement that product.

Marginal utility - extra satisfaction a consumer gets by purchasing one more unit of a product.

Diminishing Marginal Utility: The more units one buys the less eager one is to buy more. Think of diminishing marginal utility this way. It is a hot summer day and your sweating bullets. You come across a lemonade stand and gulp down a glass. It tasted great so you want another. This second glass is marginal utility. But now you reach for a third glass. Suddenly your stomach is bloated and your feeling sick. That's diminishing marginal utility!

There are two types of changes in demand:

Changes in demand - change in the demand for a product that occurs when price drops.

Changes in the Quantity Demanded - change in the amount of a product demanded regardless of price.

The difference is subtle but important. If the demand of ice cream goes up in the summer it is because consumers demand has...

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