Demand Theory

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Definition of 'Demand Theory'

Demand theory is a microeconomic theory that explains the relationship between the price of a good or service and the quantity demanded by consumers. The demand curve is a graphical representation of this relationship, and it shows how the quantity demanded changes as the price changes.

The demand curve is downward-sloping, which means that the quantity demanded decreases as the price increases. This is because consumers are less likely to buy a good or service if it is more expensive.

There are a number of factors that can affect the demand for a good or service, including:

* The price of substitute goods
* The price of complementary goods
* The income of consumers
* The tastes and preferences of consumers
* The expectations of consumers

When one of these factors changes, it can cause the demand curve to shift. For example, if the price of a substitute good decreases, the demand for the original good will decrease. This is because consumers will switch to the substitute good, which is now cheaper.

Demand theory is a useful tool for understanding how consumers make decisions about what to buy. It can also be used to predict how changes in prices, income, and other factors will affect the demand for a good or service.

In addition to the factors listed above, there are a number of other factors that can affect the demand for a good or service. These include:

* The availability of the good or service
* The advertising for the good or service
* The government regulations on the good or service
* The economic conditions in the country

All of these factors can influence the demand for a good or service, and they can all cause the demand curve to shift. By understanding the factors that affect demand, businesses can make better decisions about how to price their products and services.

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