Demand

The willingness and the ability of consumers to purchase goods and services. The allusion to willingness and ability gives the concept a particular meaning in economics. When economists talk about demand, they allude to effective demand, which is a [Page 140]combination of willingness and ability. A consumer might be willing to purchase a good, but that is all there is to it. The consumer does not have the ability or wherewithal to purchase the good and therefore cannot obtain the good from a market.

Given certain regularity conditions or assumptions, economists have tried to model consumer behavior to derive the law of demand, which states that if other factors that can affect demand don't change, consumers will buy more of a good as the price falls and less of a good as the price increases.

Practical theories such as revealed preference and marginal utility are used to indicate the choices that rational consumers will make when price, income, and marginal utility change. These theories have been used to determine the law of demand. The theory of revealed preference postulates that if consumers are rational, prices and income are sufficient to justify the law of demand by observing consumer spending in the marketplace when changes in price and income occur. This theory may be contrasted to that of demand based on satisfaction or utility derived from the consumption of a good.

The theories of revealed preference and utility are practically inseparable when a comprehensive approach is used to understand consumer behavior. Price is a common denominator in both theories. Demand is theoretically contingent on several factors, including taste or preference, income, price, the number of buyers, marginal utility, the prices of related goods (substitutes and complements), expectations of future prices, time horizon, and whether or not a good or service is essential. For more information, see Case and Fair (2003), McConnell and Brue (2008), Salvatore (2002), and Schiller (2006).