Demand – CPA Exam Definitions

Demand CPA Exam

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Demand, in economics, refers to the quantity of a product or service that consumers are willing and able to purchase at various prices during a given period. Demand is an essential concept in understanding how markets work and is a crucial factor in determining the price of goods and services. The relationship between demand and price is typically represented by the demand curve, which shows the quantity of a good or service that consumers are willing to buy at different price levels.

There are several factors that influence demand, such as:

  • Price of the product: The price of a product is a primary factor affecting demand. Generally, as the price of a product decreases, the quantity demanded increases, and vice versa. This inverse relationship is known as the law of demand.
  • Income: The income of consumers affects their ability to purchase goods and services. As income increases, the demand for normal goods typically increases, while the demand for inferior goods decreases.
  • Tastes and preferences: Consumer tastes and preferences can significantly impact the demand for a product. If a product becomes more popular or fashionable, demand for that product will likely increase.
  • Prices of related goods: The demand for a product can be affected by the prices of related goods, such as substitutes and complements. If the price of a substitute good (a good that can be used in place of another) decreases, the demand for the original product may decrease. Conversely, if the price of a complementary good (a good that is used together with another) decreases, the demand for the original product may increase.
  • Expectations: Consumer expectations about future prices or product availability can also influence demand. If consumers expect prices to increase in the future, they may increase their current demand to take advantage of lower prices.

Examples of demand in everyday situations:

  • The demand for smartphones: When a new smartphone model is released with advanced features and competitive pricing, the demand for that smartphone may increase as consumers are attracted to the new technology and value for money.
  • The demand for seasonal products: Certain products, like winter clothing, have higher demand during specific seasons (e.g., winter) when consumers need these items to keep warm.
  • The demand for luxury items: High-income individuals may have a higher demand for luxury goods, such as designer clothing or high-end cars, as their purchasing power allows them to afford these products.
  • The demand for essential goods: Products like food and basic household items typically have a consistent level of demand because they are necessary for daily living.
  • The demand for public transportation: If the price of gasoline increases, the demand for public transportation may increase as people seek more cost-effective ways to travel.

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