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Demand is defined as the quantity of a good or service consumers are able and willing to buy at a given price in a given time period.

The law of demand states that there is an inverse relationship between the price and demand of a good. As prices fall there is an expansion of demand, demand shifts out, and if the prices rise there is a contraction of demand.

Effective demand
Only when the consumers' desire to buy something is backed up by a willingness and an ability to pay for it do we speak of demand. To emphasize this point economists use the term effective demand. It is all very well to want something but if you don't have the money to purchase what you want your demand is described as latent demand.

The rational consumer
Economists assume that in deciding what to buy, consumers will tend to act rationally in their own self-interest. This means that they will choose between different goods and services in order to maximize total satisfaction. They will take into consideration

• How much satisfaction they get from buying and consuming an extra unit of a good or service.
• The market price that they have to pay to make this purchase
• The alternative cost (more about this in later sections) of the good or service -- that is how much of any other good or service one could buy for the same amount of money.

Consumers will tend to act rationally when considering a product. They will chose the good or service that gives the most in return for their money.

It is worth mentioning that the rational consumer is in essence a psychopath who puts himself first in any given situation.