Demand Theory
Demand theory is an important concept in economics that studies consumers' willingness to purchase goods and services at different price levels. It explores how factors such as price, income, and preferences affect the quantity demanded and reveals the shape and movement of the demand curve. Demand theory helps understand market behavior and formulate economic policies.
Definition: Demand theory is a crucial concept in economics that studies consumers' willingness to purchase goods and services at different price levels. It explores how factors such as price, income, and preferences affect the quantity demanded and reveals the shape and movement of the demand curve. Demand theory helps understand market behavior and formulate economic policies.
Origin: The origin of demand theory can be traced back to the late 18th and early 19th centuries when economists like Adam Smith and David Ricardo first introduced the basic concepts of demand and supply. In the late 19th century, Alfred Marshall systematically elaborated on the demand curve and the law of demand in his book 'Principles of Economics,' laying the foundation for modern demand theory.
Categories and Characteristics: Demand theory is mainly divided into individual demand and market demand. Individual demand studies the purchasing behavior of a single consumer at different price levels, while market demand is the aggregate demand of all consumers. Characteristics of demand include: 1. The inverse relationship between price and quantity demanded, meaning higher prices lead to lower demand; 2. Income effect and substitution effect, where an increase in income generally increases demand, and changes in the price of substitutes affect demand; 3. Demand elasticity, which reflects the sensitivity of quantity demanded to price changes.
Specific Cases: 1. Demand for Apple iPhones: When Apple releases a new model, the price of older models usually drops, leading to an increase in demand for the older models. This is a typical example of the inverse relationship between price and quantity demanded. 2. Gasoline demand: When gasoline prices rise, consumers may reduce their gasoline usage and opt for public transportation or more fuel-efficient cars, illustrating the substitution effect.
Common Questions: 1. Why does quantity demanded increase when prices fall? This is because consumers are more willing to purchase goods at lower prices. 2. Why does the demand curve slope downward to the right? This is due to the inverse relationship between price and quantity demanded. 3. What is demand elasticity? Demand elasticity refers to the sensitivity of quantity demanded to price changes, with high elasticity indicating that quantity demanded is very responsive to price changes.
