Demand Theory
Candlefocus EditorIn demand theory, there are several different types of demand that are employed in order to predict the pricing of various goods and services. The most common types of demand are known as price-based demand and quantity-based demand.
Price-based demand is a term used to describe the relationship between the quantity of a good or service that is demanded, and its price. In this type of demand, the increase in quantity is determined by the decrease in price. The relationship can be seen as an inverse, where an increase in price causes a decrease in the quantity of a product that consumers are willing to purchase.
Quantity-based demand, on the other hand, is determined by the inverse relationship between the quantity of a product demanded, and the price. In this type of demand, the increase in price causes an increase in the quantity of a product that is demanded, leading to a direct relationship between the two variables. This type of demand is often referred to as the Law of Demand, as it outlines how changes in the price of a product can affect the level of demand.
In addition to price-based and quantity-based demand, there is also the concept of cross-price elasticity of demand. This type of elasticity analyses how changes in the price of one good or service may lead to changes in the demand for another. As an example, an increase in the price of apples could lead to an increase in the demand for oranges, as consumers may look to substitute the more expensive apples for the cheaper oranges. This concept of cross-price elasticity plays a central role in demand theory, particularly when considering competitive markets, as it helps to understand how changes in one good can have an effect on another.
Overall, demand theory is an important way of understanding pricing in competitive markets, as it helps to identify relationships between demand, supply, and price. It is often used by businesses and economists in order to predict pricing, as well as to consider the long-term effects of changes in the market.