key term - Decrease in Demand

Definition

A decrease in demand refers to a situation where consumers are willing and able to buy less of a good or service at every price level. This shift often results from factors such as changes in consumer preferences, income levels, or the prices of related goods. When demand decreases, it impacts market equilibrium by causing a surplus at existing prices, which may lead to a reduction in the market price as suppliers adjust to the new lower demand.

5 Must Know Facts For Your Next Test

1. A decrease in demand can be caused by factors like a drop in consumer income or negative changes in consumer tastes and preferences.
2. When demand decreases, the original equilibrium price is often too high, leading to excess supply and prompting sellers to lower prices.
3. Market disequilibrium occurs when there is a persistent surplus due to decreased demand, affecting how suppliers respond to changing market conditions.
4. Graphically, a decrease in demand is represented by a leftward shift of the demand curve on a price-quantity graph.
5. In some cases, a decrease in demand may also influence complementary goods, leading to decreased demand for those products as well.

Review Questions

• How does a decrease in demand affect market equilibrium?
  • A decrease in demand causes the demand curve to shift leftward, resulting in a new equilibrium where the quantity demanded is lower at each price. This change typically leads to excess supply at the original equilibrium price, as sellers find themselves unable to sell all their products. To eliminate this surplus, suppliers may lower their prices, ultimately moving the market toward a new equilibrium with both a lower quantity and lower price.
• What are some common factors that can lead to a decrease in demand for a product?
  • Several factors can contribute to a decrease in demand, including rising prices of related goods (substitutes becoming cheaper), decreases in consumer income, changes in consumer tastes favoring other products, or expectations of future price drops. Each of these elements can influence consumer purchasing behavior, leading them to seek less of the affected product at existing prices.
• Evaluate the long-term implications of sustained decreases in demand for producers and the overall market.
  • Sustained decreases in demand can have significant long-term effects on producers and the overall market. Producers may face declining revenues and profits, leading them to cut back on production, lay off workers, or even exit the market entirely. This could result in reduced competition and innovation within the industry. Additionally, if many producers exit due to continued low demand, it could further exacerbate market disequilibrium and lead to higher prices for remaining goods as supply diminishes.

Related terms

Demand Curve:

A graphical representation showing the relationship between the price of a good and the quantity demanded by consumers.

Market Equilibrium:

The point at which the quantity demanded equals the quantity supplied, resulting in a stable market price.

Shift in Demand: A change in demand that occurs when a determinant of demand other than price changes, resulting in a new demand curve.