1. Definition Demand
Demand is a schedule or a curve that shows the various amounts of a product that consumers are willing and able to purchase at each of a series of possible prices during a specified period of time. 1 Demand shows the quantities of a product that will be purchased at various possible prices, other things equal.
2. The Factors that Effect Demand
Now let’s see how changes in each determinant affect demand.
Tastes A favorable change in consumer tastes (preferences) for a product—a change that makes the product more desirable—means that more of it will be demanded at each price. Demand will increase; the demand curve will shift rightward. An unfavorable change in consumer preferences will decrease demand, shifting the demand curve to the left.
Number of Buyers An increase in the number of buyers in a market is likely to increase product demand; a decrease in the number of buyers will probably decrease demand. For example, the rising number of older persons in the United States in recent years has increased the demand for motor homes, medical care, and retirement communities. Large-scale immigration from Mexico has greatly increased the demand for a range of goods and services in the Southwest, including Mexican food products in local grocery stores. Improvements in communications have given financial markets international range and have thus increased the demand for stocks and bonds. International trade agreements have reduced foreign trade barriers to American farm commodities, increasing the number of buyers and therefore the demand for those products.
Income How changes in income affect demand is a more complex matter. For most products, a rise in income causes an increase in demand. Consumers typically buy more steaks, furniture, and electronic equipment as their incomes increase. Conversely, the demand for such products declines as their incomes fall. Products whose demand varies directly with money income are called superior goods,
or normal goods .
Prices of Related Goods A change in the price of a related good may either increase or decrease the demand for a product, depending on whether the related good is a substitute or a complement:
• A substitute good is one that can be used in place of another good.
• A complementary good is one that is used together with another good.
Substitutes Häagen-Dazs ice cream and Ben & Jerry’s ice cream are substitute goods or, simply, substitutes. When two products are substitutes, an increase in the price of one will increase the demand for the other. Conversely, a decrease in the price of one will decrease the demand for the other. For example, when the price of Häagen-Dazs ice cream rises, consumers will buy less of it and increase their demand for Ben & Jerry’s ice cream. When the price of Colgate toothpaste declines, the demand for rest decreases.So it is with other product pairs such as Nikes and Reeboks, Budweiser and Miller beer, or Chevrolets and Fords. They are substitutes in consumption .
Complements Because complementary goods (or, simply, complements ) are used together, they are typically demanded jointly. Examples include computers and software, cell phones and cellular service, and snowboards and lift tickets. If the price of a complement (for example, lettuce) goes up, the demand for the related good (salad dressing) will decline. Conversely, if the price of a complement (for example, tuition) falls, the demand for a related good (textbooks) will increase.
3. Law of Demand
A fundamental characteristic of demand is this: Other things equal, as price falls, the quantity demanded rises, and as price rises, the quantity demanded falls. In short, there is a negative or inverse relationship
between price and quantity demanded. Economists call this inverse relationship the law of demand .
The other-things-equal assumption is critical here. Many factors other than the price of the product being
considered affect the amount purchased. For example, the quantity of Nikes purchased will depend not only on the price of Nikes but also on the prices of such substitutes as Reeboks, Adidas, and New Balances. The law of demand in this case says that fewer Nikes will be purchased if the price of Nikes rises and if the prices of Reeboks, Adidas, and New Balances all remain constant. In short, if the relative price of Nikes rises, fewer Nikes will be bought. However, if the price of Nikes and the prices of all other competing shoes increase by some amount—say, $5—consumers might buy more, less, or the same number of Nikes.
Why the inverse relationship between price and quantity demanded? Let’s look at three explanations, beginning with the simplest one:
• The law of demand is consistent with common sense. People ordinarily do buy more of a product at a low price than at a high price. Price is an obstacle that deters consumers from buying. The higher thatvobstacle, the less of a product they will buy; the lower the price obstacle, the more they will buy. The factv that businesses have “sales” is evidence of their belief in the law of demand.
• In any specific time period, each buyer of a product will derive less satisfaction (or benefit, or utility) from each successive unit of the product consumed. The second Big Mac will yield less satisfaction to the consumer than the first, and the third still less than the second. That is, consumption is subject to diminishing marginal utility . And because successive units of a particular product yield less and less marginal utility, consumers will buy additional units only if the price of those units is progressively reduced.
• We can also explain the law of demand in terms of income and substitution effects. The income effect indicates that a lower price increases the purchasing power of a buyer’s money income, enabling the buyer to purchase more of the product than before. A higher price has the opposite effect. The substitution effect suggests that at a lower price buyers have the incentive to substitute what is now a less expensive product for similar products that are now relatively more expensive. The product whose price has fallen is now “a better deal” relative to the other products.
3. The Demand Curve
The inverse relationship between price and quantity demanded for any product can be represented on a simple graph, in which, by convention, we measure quantity demanded on the horizontal axis and price on the vertical axis. In the graph in Figure 3.1 we have plotted the five price-quantity data points listed in the accompanying table and connected the points with a smooth curve, labeled D . Such a curve is called a demand curve . Its downward slope reflects the law of demand—people buy more of a product, service, or resource as its price falls. The relationship between price and quantity demanded is inverse (or negative).
The table and graph in Figure 3.1 contain exactly the same data and reflect the same relationship between price and quantity demanded. But the graph shows that relationship much more simply and clearly than a table or a description in words.