Consumer demand in a free market economy is based upon the supply-and-demand curve theory. Economists use supply and demand to determine the needs of individual consumers and large sections of the economy by using supply-and-demand charts to gauge consumer behavior.
Supply and Demand
Supply and demand is the basic economic theory of the free market economy. The theory evolves from the facts that some individuals and companies have goods to sell, while other individuals and companies have needs to be met through purchasing goods. These two groups come together in the supply-and-demand theory, where each group can meet their needs using the other group’s goods.
Using charts to explain how supply and demand works is a popular tool among free market economists.
A supply-and-demand chart is designed using a horizontal axis representing price and a vertical axis representing quantity. The demand curve is a line on the supply and demand chart that starts out high on the left-hand side of the chart and slowly moves downward on the right-hand side of the chart.
Because most consumer demand is driven by price, the demand for items goes up as price goes down. This is represented on the supply-and-demand chart by the demand curve; as the curve moves down and to the right, the price goes lower and the quantity demanded goes up.
Shifts along the demand curve are quite common in free market economies. Because prices for goods are determined by the marketplace, any change in the existing market or consumer demand may shift the quantity of goods demanded. Changes in raw materials cost, new competitors entering the market or reduced consumer demand may cause a shift along the demand curve. Quantity-demanded shifts can go either up or down based on the changes in the marketplace relating to prices and consumer demand.
Demand Curve Shift
The demand curve may shift to the right or left entirely based on certain conditions in the market place. Demand curve shifts occur from reasons in the marketplace not related to the price of goods on the market. Several reasons for a demand curve shift exist in a marketplace, including:
- Change in consumer preference - Price of substitute goods - Change in disposable income - Loss of purchasing power - Change in population size
Effects on Supply
Any change in demand can have a positive or negative effect on the supply curve, which represents the total amount of goods for sale in the marketplace. Sellers have more flexibility in quantity-demanded shifts, since these changes are based on the price of goods. When the shift is toward less demand, they must find ways to lower costs and re-establish previous levels of consumer demand. Shifts in the demand curve can dramatically change the marketplace, forcing sellers to radically change their production of goods.