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Chapter 7

Demand

2.1 Individual and market demand

Individual demand represents the amount that a consumer is willing and able to
purchase at a given price – i.e. effective demand. Market demand shows the total
amount of effective demand from all the consumers in a market – it is an aggregate.

2.2 Substitution effect and income effect

For most goods, the lower the price, the higher will be its demand. This is the result
of two processes:

 There is a substitution effect. This is where a consumer buys more of one
good and less of another because of the relative price changes. Thus is two
goods are substitutes, a fall in price of the first will lead consumers to switch
some demand to the lower-price good.

 There is an income effect. This is where a change in the price of a good affects
the purchasing power of the consumers’ income (a change in their real income).
If the price of a good falls, the consumer experiences a rise in their real income
and, as a result, tends to buy more of all normal goods and services.

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