Demand
Demand refers to the buyer side
of the market. In this section, let’s
explore the basic topics about
demand. Note: don’t worry about
the supply side of the market
here.
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Demand
Demand, in general, refers to how much of a product
consumers want during a particular time period. The
amount consumers want is influenced by, among other
things,
1) the price of the product,
2) the consumer desire or taste and preference for the
product,
3) the level of prices of other goods,
4) the level of consumer income,
5) the number of consumers in the market.
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The law of demand
The price of the product is a major influence of how much
of a product consumers want. The relationship between
the price and how much consumers want is elevated to a
LAW in economics.
The law of demand is our summary statement about how
the price of a product influences how much we want. The
law is a statement that the price and quantity demanded
are inversely related.
Inversely here means, and note the order of terms used, if
the price (think of price moving first) of the product
moves in one direction the quantity demanded moves in
the opposite direction.
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Change in demand
If any of the items from our list from 2 to 5 should change,
then we say there is a change in demand. Economists
treat items 2 through 5 differently than the price item. If
the price should change we say there is a change in the
quantity demanded.
The logic behind this difference is the desire to use graphs
as an aid to economic understanding. The graphs used
most often are of only two dimensions. Q and P are the
two primary variables of interest. Other variables (like
consumer income), called factors or determinants, may be
of interest and so a different term is used to indicate those
situations. The determinants of demand are associated
with the demand curve shifting.
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A change in quantity
P demanded
As the price changes
P1 from, say, P1 to P2 we
call the change in Q
P2 from Q1 to Q2 a
D
change in the quantity
Q demanded.
Q1 Q2
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P
A change in demand
At a given price, if a
P1 determinant of
D2 demand should
change (here
D1
increasing the
Q demand)we call the
Q1 Q2 change in Q from Q1
to Q2 a change in the
demand.
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change in demand in a graph
P
As a consumer if you think about
D1 D2 items 2 through 5 in our earlier list,
P1 when you see those items as being
stable you then have a certain demand
P2 for the product. In a graph this means
Q you demand curve is located at a
Q1 Q2 certain place. Let’s say yours is at D1.
If the price should fall from P1 to P2 the movement from
Q1 to Q2 is called a change in the quantity demanded -
we move along the curve. If an item from our list 2 to 5
should change(and we started at P1) the movement from
Q1 to Q2 is called a change in demand - the curve shifts.
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Demand shifters
What follows are the items 2 through 5 from our list and we see
how each leads to a shifting of the demand curve.
P
An increase in
demand has the curve
shift right
A decrease in
demand has the
curve shift left D
Q
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Digression
What happens to amount of corn grown the more rain we get
(ignoring in our story too much rain)? You would say the more rain
the more corn.
When you talk about two variables changing and the change is in the
same direction on both, then you can use a shorthand language and
just say the two variables are directly related, or positively related.
If the variables move in opposite directions, then the variables are
said to be inversely related, or negatively related.
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Impact of a taste change
Many things may cause a change in
taste and preference: advertising, news
or information and technological
change are just a few.
taste and demand are directly related.
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Impact of price of related
goods
There are two types of goods in this
regard-complements and substitutes.
What’s a complement? A good used
with another good.The price of a
complement and demand for the good
in question are inversely related.
The price of a substitute and demand for the
good in question are directly related.
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Are coffee and donuts substitutes for, or complements to, each
other? I say complements and therefore if the price of donuts goes
up (oh no, say it ain’t so) then the demand for coffee would fall.
Are butter and margarine substitutes for, or complements to, each
other? I say substitutes and therefore if the price of butter rises then
the demand for margarine will rise.
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Impact of income
There are two types of goods in this regard-
normal and inferior.
A normal good is one where income and
demand are directly related and an inferior
good is one where income and demand are
inversely related.
Can you classify a cassette and a CD as a
means to play music? Are they both normal?
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Impact of the number of
consumers
The number of consumers and the demand are directly
related.
The are more determinants of demand. The ones listed here
are generic. If you pay attention to the detail here you can
use the same logic in more specific situations. (But, when
we get to a test you can not earn points by making up other
ideas. We will use this list this term.)
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