Demand and Consumer Choice

The demand schedule indicates the amount of a good that consumers would be willing to buy at each potential price. The first law of demand states that the quantity of a product demanded is inversely related to its price. A reduction in the price of a product reduces the opportunity cost of consuming it. At the lower price, many consumers will substitute the now cheaper good for other products. In contrast, higher prices will   induce consumers to buy less as they turn to substitutes that are now relatively cheaper.

The market demand curve reflects the demand of individuals. It is simply the horizontal sum of the demand curves of individuals in the market area.

In addition to price, the demand for a product is influenced by the (a) level of consumer income, (b) distribution of income among consumers, (c) price of related products (substitutes and complements), (d) preferences of consumers, (e) population in the market area, and (f) consumer expectations about the future price of the product. Changes in any of these six factors will cause the demand for the product to change (the entire curve to shift).

Consumers usually gain from the purchase of a good. The difference between the amount that consumers would be willing to pay for a good and the amount they actually pay is called consumer surplus It is measured by the area under the demand curve but above the market price.

Time, like money; is scarce for consumers. Consumers consider both time and money costs when they make decisions. Other things constant, a reduction in the time cost of consuming a good will induce consumers to purchase more of the good.

Price elasticity reveals the responsiveness of the amount purchased to a change in price. When there are good substitutes available and the item forms a sizable component of the consumer's budget, its demand will tend to be more elastic. Typically, the price elasticity of a product will increase as more time is allowed for consumers to adjust to the price   change. This direct relationship between the size of the elasticity coefficient and the length of the adjustment time period is often referred to as the second law of demand.

Both functional and subjective factors influence the demand for a product. Some goods are chosen because they have "snob appeal."  Goods may also have a "bandwagon effect," fulfilling a consumer's desire to be fashionable. Observation suggests that goods are demanded for a variety of reasons.

The precise effect of advertising on consumer decisions is difficult to evaluate. The magnitude of advertising by profit-seeking business firms is strong evidence that it influences consumer decisions. Advertising  often reduces the amount of time consumers must spend looking for a product and helps them make more informed choices. However, a sizable share of all advertising expenditures is largely for noninformational messages. Although this is a controversial area, it is clearly much easier to point out the shortcomings of advertising than to devise an alternative that would not have similar imperfections.