Introduction

Demand represents the relation between demanded, purchased quantity of a good and the market price. Generally it is to express that with an increasing price of good, the willingness to buy is declining and also in the opposite way, that with a decreasing price of good, the willingness to buy a good is increasing. This relation is called the law of downward-sloping demand and can be described also through a graph in the form of a demand curve. The quantity of a good is on the horizontal axis and the price on the vertical axis, so the quantity and price are inversely related. That means the dependent volume is quantity and the independent volume the price (Samuelson and Nordhaus 1992). The demand curve slopes downward (Fig. 1):

Demand, Fig. 1
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The demand curve (Hardes et al. 1995, p. 15)

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The first, who graphically defined the demand, was in the nineteenth century A. Marshall.

When describing and analyzing the demand, it is important to distinguish the type of demanded good, that’s why we are speaking about the demand for consumer goods and the demand for production factors.

Demand for Consumer Goods

Demand for consumer goods is affected besides the price also by several non-price factors, which effect we can express, if we consider the price as a fixed value (compliance with the condition of ceteris paribus). Factors other than price influencing demand are price change of substitute goods, price change of complementary goods, change in the number of households on the market, change of the buyer’s income, change of consumer’s preferences, expectance of a future good’s price change, or exceptional circumstances.

The substitute good is a good which replaces the original good and which satisfies the same need, for example, glasses and contact lenses or ice cream and ice lolly. If there is a price change of a substitute good, it affects the original good’s demand, for example, if the price of a substitute good (price of an ice cream) decreases, then the demand for the original good (ice lolly) drops without a change in the price of the original good (ice lolly) (Fig. 2).

Demand, Fig. 2
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Price change of a substitute good as a factor influencing demand (own; Samuelson and Nordhaus 1992, p. 59; Frank and Bernanke 2011/2009, p. 75)

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Complementary goods represent goods, in which consumption is interlinked or supplemented, for example, computer and software or skis and sky shoes. In this kind of goods, it is also applied that if the price of a complementary good changes, it affects also the original good’s demand. For example, if the price of software of several companies increases, not only the demand for the software decreases due to the effects of the law of decreasing demand but also the demand for computers. Thus price increases of a complementary good will cause a decrease of demand for a complementary good and also for an original good. If the price of a complementary good decreases, the demand for complementary good will increase and also the demand for an original good will increase.

A change of the number of households can affect the demand in a following way. Should the number of buyers increase, for example, due to migration, then the demand at such a market will increase and the demand curve moves to the right. Other way round, should the number of buyers decrease, there will be less subjects who will buy and that’s why also the total demand at the market will decrease and the whole demand curve moves to the left.

A change in the income of consumers is also an important factor affecting the demand at the market. When the income of consumers is increasing, their willingness to buy is also increasing and that’s why the demand is increasing and the demand curve moves to the right. If the income of consumers is decreasing, this factor affects in the opposite way.

Change in preferences of consumers is a reaction of the consumers, for example, to fashion trends (tight jeans) or to the change of lifestyle (preference of a healthy lifestyle); they are related also to hobbies or as a reaction on seller’s marketing tools. If any impulse causes a growth in preferences of specific products, there is also an increase of demand and the demand curve of such products moves to the right.

Consumers can have future expectations that the price of a good will increase or decrease. If they expect that the future price will be lower, for example, sellouts and after-Christmas discounts, today they will demand less and the demand curve moves to the left. If they expect that the future price will grow, today they will demand more and buy on stock and the demand curve moves to the right.

Demand is affected also by many exceptional factors and unexpected circumstances, for example, epidemics and floods, which increase the demand for concrete goods.

Distinguishing Between the Movement on the Curve and the Movement of the Curve

Considering demand one has to distinguish between a shift of demand and a change along the demand curve. For example, demand shifts if the preferences of individuals vary or if the future expectations change. In contrary to that, a change in the price induces movements along the demand curve without shifting it.

Income and Substitute Effect

The existence of the law of decreasing demand is connected with and explained by two reasons (effects): the income and substitute effect. If the price of a good is increasing, then the substitute effect expresses the consumer’s effort to replace – substitute the consumption of an original good, in which price has increased, with a substitute good. When increasing price of a good, also the income effect appears. It describes the behavior of consumers, so the consumers are feeling poorer when the price of goods is increasing. Thus the consumers will buy and demand less of a good, which has become more expensive (Frank and Bernanke 2011/2009, p. 65)

Giffen’s Goods and the Demand of Inferior and Luxury Goods

The already described law of decreasing demand applies in a large extent, but it does not apply absolutely. However, it is possible that an increase in price level leads to an increase in demand, so-called Giffen paradox. It was found first by R. Giffen, who observed the demand for bread and meat of poor people in Ireland (Marshall 1997). In his considerations bread was an inferior product. This means that a higher income leads to lower demand for bread and higher demand for meat. He discovered that an increase in the bread price lead to an increase in the demand for bread. A modern approach to discuss Giffen’s goods is delivered by Jensen and Miller (2008).

Demand Elasticity

Although the law of decreasing demand suggests that with the growth of price, the market demand will decrease, such a statement is not clear about how much the demand will decrease. This is answered by the direct price elasticity, which expresses what the percentage change of demanded goods will be, if the price of a good changes. Direct price elasticity is measured by the elasticity coefficient, which can be in the interval <0, unendlich> (Siebert 1996, pp. 79–82). The higher the number of the coefficient, the bigger is the reaction of demand to the price change and thus the bigger is the elasticity of demand. The more the demand is elastic, the more the demand curve is horizontal and vice versa; the less elasticity, the more vertical the demand curve. Besides the direct price demand elasticity, also income demand elasticity and indirect price demand elasticity exist.

Individual, Market, and Aggregate Demand

If we are analyzing one consumer’s demand and how this consumer chooses demanded quantities related to different prices, such a demand is referred to as an individual demand. It expresses the relation between different prices of the good and of quantity what one consumer would demand related to the price. His demand is expressed by the individual demand curve, and it can be derived through an indifference analysis when examining the consumer’s optimum through indifference curves and budget lines.

The sum of individual demands will create a market demand, which is the demand of all consumers for one good. Aggregate demand is a demand of all subjects for all goods in the economy.

Production Factor’s Demand

Demand for consumer goods determines how the demand for production factors will be; that’s why we are saying that the demand for production factors is a derived demand.

Conclusion

Demand analysis is always connected to concrete goods or to a concrete group of consumers or to concrete markets. If we want to better understand the functioning of markets through the demand analysis, it is appropriate to link the demand analysis with supply.