Economists use the term demand to refer to the amount of some good or service consumers are willing and able to purchase at each price. Demand is based on needs and wants — a consumer may be able to differentiate between a need and a want, but from an economist’s perspective they are the same thing. Demand is also based on ability to pay. If you cannot pay for it, you have no effective demand. What a buyer pays for a unit of the specific good or service is called price . The total number of units purchased at that price is called the quantity demanded .
Demand is the relationship between the quantity demanded and price of the good when all other influences on buying plans remain the same. A demand curve is a relationship between two, and only two, variables: quantity on the horizontal axis and price on the vertical axis.
A rise in price of a good or service almost always decreases the quantity demanded of that good or service. Conversely, a fall in price will increase the quantity demanded. When the price of a gallon of gasoline goes up, for example, people look for ways to reduce their consumption by combining several errands, commuting by carpool or mass transit, or taking weekend or vacation trips closer to home. Economists call this inverse relationship between price and quantity demanded the law of demand. The law of demand assumes that all other variables that affect demand (to be explained in the next pages) are held constant. (4)
Demand for Gasoline
An example from the market for gasoline can be shown in the form of a table or graph. A table that shows the quantity demanded at each price, such as Table 2.1 , is called a demand schedule . Price in this case is measured in dollars per gallon of gasoline. The quantity demanded is measured in millions of gallons over some time period (for example, per day or per year) and over some geographic area (like a state or a country).
A demand curve shows the relationship between price and quantity demanded on a graph like Figure 2.1 , with quantity on the horizontal axis and the price per gallon on the vertical axis. (Note that this is an exception to the normal rule in mathematics that the independent variable (x) goes on the horizontal axis and the dependent variable (y) goes on the vertical. Economics principles are not always perfect matches to mathematical principles.)
The demand schedule shown by Table 2.1 and the demand curve shown by the graph in Figure 2.1 are two ways of describing the same relationship between price and quantity demanded.
The demand schedule shows that as price rises, quantity demanded decreases, and vice versa. These points are then graphed, and the line connecting them is the demand curve (D). The downward slope of the demand curve again illustrates the law of demand—the inverse relationship between prices and quantity demanded. (4)
Table 2.1 Price and Quantity Demanded of Gasoline
(millions of gallons)
Demand and Law of Demand
Demand curves will appear somewhat different for each product. They may appear relatively steep or flat, or they may be straight or curved. Nearly all demand curves share the fundamental similarity that they slope down from left to right. So, demand curves embody the law of demand: As the price increases, the quantity demanded decreases, and conversely, as the price decreases, the quantity demanded increases, other things equal. Therefore, the demand curve slopes downward due to the negative relationship between P and Q D . (4)
In economic terminology, demand is not the same as quantity demanded, because demand refers to the curve and quantity demanded refers to the (specific) point on the curve. Whenever only price changes , and all other factors that influence demand remain the same, we move along the demand curve, as the new price is matched to its corresponding quantity demanded. (1)
Now we will look at other factors, besides the price of a good itself that affect demand. When changing, these factors affect the demand curve by shifting it to the right (if demand increases) or to the left (if demand decreases). Thus, in our demand and supply model, we will refer to the following factors as demand shifters. Notice that for a good or service, there might be other important factors that affect demand, thus this list can be thought of as a theoretical list, which will cover the most important determinants of demand.
- Prices of related goods: substitutes and complements
- Expectations in general
- Expected future prices
- Expected future income and credit
- Society’s income
- Normal goods
- Inferior goods
- Number of buyers (market demand depends on number of buyers)
- Preferences (taste & attractiveness)
- â€¢ If one of these factors changes (increases or decreases), the demand curve shifts .
- If demand increases , the demand curve shifts right . Why? (The quantity demanded (on the horizontal quantity axis) increases when we move from 0 to + infinity, thus from left to right)
- If demand decreases , the demand curve shifts left . Why? (When moving from right to left (towards 0) the quantity demanded decreases on the quantity axis)
The graph summarizes demand shifters leading to an increase or decrease in demand. In addition, it emphasizes that what causes amovement along the demand curve is the change in the own price of the good or service. (1)