What is Consumer Demand Theory?

Consumer demand theory is a tool used by economists to explain how people decide what to buy and how much to buy. It is based on the idea that people make rational decisions about their purchases, taking into account both their income and the prices of the goods and services they want to buy. The theory is used to explain how changes in prices, income and preferences affect demand for products and services.

Factors Affecting Demand

The demand for a good or service is determined by several factors, including its price, the prices of related goods, the income of potential buyers, and the preferences of buyers. Changes in any of these factors can cause demand to increase or decrease.

Price of the Good or Service

The most important factor affecting demand is the price of the good or service. Generally, as price increases, demand decreases and vice versa. This is known as the law of demand. However, there are exceptions to this rule, such as when a product is seen as a status symbol or is in limited supply.

Prices of Related Goods

The prices of related goods can also affect demand. For example, if the price of one type of car increases, demand for other types of cars may also increase as people look for cheaper alternatives.

Income of Potential Buyers

The income of potential buyers also affects demand. Generally, as income increases, demand increases, and vice versa. This is known as the income effect.

Preferences of Buyers

The preferences of buyers can also affect demand. For example, if a new fashion trend emerges, demand for clothes of that style may increase.

Related Questions

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