Empowering Economic Minds
Demand
The Law of Demand
You know how your mom always says, "Money doesn't grow on trees"? Well, that is basically what the law of demand is all about. It basically puts a face to the saying, "As things become more expensive, we tend to buy less of them." When things become cheaper, we're more likely to grab them up.
Think of it this way: You're at the mall and passing by those kicks that you've been lusting over for the past months. If they are having a sale, then you most likely will say, "Score! I'm getting two!" But if the price zooms up, you probably will walk away mumbling, "I guess I don't need new kicks that badly."
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This is not rocket science; it's what we do naturally. If prices go up, we tighten our belts. If they fall, well, we might splurge a bit. It is almost like a see-saw: as the price goes up, the quantity we buy goes down, and vice versa.
This is what the Law of Demand is about. The law states that the quantity purchased varies inversely with price. In other words, the higher the price, the lower the quantity demanded.
Now, there are a couple of reasons why we behave this way. First is the whole substitution thing. If beef prices go through the roof, you might start thinking, "Hey, chicken is looking pretty good right now." We're always on the lookout for a better deal.
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The income effect: should prices fall, it would be tantamount to getting a mini-raise. Now, your money gets you more, and suddenly you are in a position to buy more things. It's as if you find an extra $20 in your jeans pocket—suddenly, you do feel richer than you actually are.
And then there is the "too much of a good thing" effect. Yes, that first slice of pizza does sound heavenly. But by slice number five? You're probably thinking, "Ugh, I can't look at another pepperoni." That's why we're more likely to buy more when it's cheaper-we can indulge without breaking the bank.
Now, there are some weird exceptions to this rule. Those designers who make those really fancy bags that somehow do sell more the higher the price is. But most everyday stuff is going to stick very closely to the Law of Demand.
Determinants of Demand
Demand. It's just a fancy way of saying "how much stuff people want to buy." Imagine that you're scrolling through your favorite online retailer, ogling the brand new technology that you've had a crush on all these weeks. There is a host of factors that will decide whether you click "add to cart" or you keep on scrolling—that's basically demand.
In Economics, Demand is the quantity of a good or service that clients are both ready and able to buy at different prices over a certain period. Knowledge of demand explains the mode of consumption that people follow and their behavior, which determines the market.
Suppose that you are a gamer, and some of the new games have just hit the market. Well, if it is $60, you would probably like to get it if you got enough money saved and if you think it's a good price. On the other hand, once it dropped to $40 during a sale, it gave you the urge to go for it, as will many other gamers. This increases the number of people who are ready to buy the game at the lowered price, a demonstration of the law of demand.
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Demand is determined by several factors. According to the law of demand, one of the most important causes of changes in demand is the price for the particular good or service. Nevertheless, there are a few other crucial factors: income of consumers, tastes and preferences, prices of related goods and future expectations.
Let's begin with consumer income. Say that you take a part-time job and your income increases. You might decide to consume more of, or higher quality, goods. You may want to spend your increased income upgrading from a low-end smartphone to a high-end model, for example. If your income falls, though, you would likely reduce how much of discretionary goods—dining out or new clothes—you consume.
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Demand also includes tastes, market size and preferences. If there is a trend, all of the sudden, that everyone must have a pair of a particular brand of sneakers, then the demand for sneakers will increase. Firms can attempt to influence tastes and preferences by advertising and drive demand towards their product.
Prices of related goods can also change demand. There are two categories of related goods: substitutes and complements. Both are goods wherein only one aspect of the good is included, meaning the presence of one good leads to directly opposing effects in demand for the other.
A good example are two substitutes - tea and coffee. When the price for coffee increases, there is a high likelihood that people might take in more tea as a result, the demand for tea increases.
Complementary goods are those goods consumed together, for instance, smartphones and applications. If the price of smartphones decreases, more people will buy smartphones; hence, more apps will be demanded.
Demand too, can be affected by what you believe might happen in the future. For example, if you think that something is going to become more expensive in the near future then, to avoid paying a higher price later on, you may buy more now. Consider the case when you hear that gas prices will be higher next week. You might want to fill up your car today, which will push up the demand for gas today.
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Alright, future market movers and shakers, let's bring it home! Demand isn't just some dusty old concept in a textbook – it's the invisible force shaping the world around you every single day. It's why that new sneaker drop sells out in seconds, why concert tickets for your favorite band are suddenly through the roof, and why your local burger joint started offering plant-based options. You're not just a consumer; you're a demand-creating machine! Every time you tap that 'buy now' button, line up for the latest movie, or even just window shop, you're flexing your economic muscles. So next time you're scrolling through your feed and an ad pops up for something you were just talking about, remember – you're not just being spied on, you're witnessing demand in action! The market is listening, adapting, and evolving based on what you and your friends want. Pretty cool, huh? Now go forth and demand responsibly – your purchasing power is your superpower!
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The Demand Schedule and the Demand Curve
Say you are going to run a lemonade stand. You want to know how much lemonade people will buy at different prices. That's really all a demand schedule is: it's kind of a cheat sheet showing you how many cups you might sell if you charge $1, $2, or even $3 a pop.
A demand schedule is simply a table containing information on the quantities of any good or service demanded at different prices in a specific period, ceteris paribus.
Let’s go back to the lemonade example. Let us assume that Nina intends to buy lemonade from your stand for a cup of lemonade if you charge $3 a pop, 2 cups if you charge $2 dollars per cup, and 3 cups of lemonade if you offer $1 per cup. We can create the demand schedule of Nina as:
Now, if you are more of a visual person, or just hate tables, then you might prefer this demand curve. It is the same information but in graph form. Think of it like a ski slope—as the price goes up, that's on the up-and-down line, the number of cups people want to buy, that's on the left-to-right line, goes down. Just like gravity for prices!
The graphical representation of the demand schedule is the demand curve. The price of the good is on the y-axis, and the quantity demanded on the x-axis.
Going back to Nina’s demand schedule, we can plot Nina’s demand in a graphical way as:
On the other hand, the quantity demanded of a good or service refers to the quantity that buyers are willing and able to buy at a particular price during a particular period when all other factors are held constant.
By "quantity demanded," we're getting specific. It's not just how much lemonade people want; it is how much they're willing and able to buy at a certain price. Maybe everybody in the neighborhood wants your lemonade, but if you're charging $100 a cup, the "quantity demanded" is going to be pretty low—unless you live next door to Bill Gates.
A normal demand curve slopes downwards from left to right. This follows that once the price decreases, the quantity demand increases and vice versa.
Now, here's where it comes in handy in real life. Businesses do this stuff all of the time. Say you run that bakery. Well, if you see everyone going ape for gluten-free cupcakes, you might bump up production. It's kind of like reading people's minds, but for their stomachs—and their wallets.
It's even done by governments. They use demand information to figure things like taxes. If they slap on a big tax on soda, they can predict how that might change how much soda people buy.
Basically, understanding demand gives a business answers to being inside people's heads and pockets: what they want, how much they are willing to pay, and how that changes based on things like income or what's in style.
So the next time you're about to buy something, remember that you don't simply shop; you're part of this whole economic dance. Pretty cool when you think about it, right?
Conclusions
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The Law of Demand explains that the quantity of goods or services purchased varies inversely with price. In other words, the higher the price, the lower the quantity demanded.
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Many different factors influence demand. The price of a specific product or service is one of the most significant factors contributing to changes in demand, as per the law of demand. However, there are a few additional critical factors that must be considered: the income of consumers, their tastes and preferences, the prices of related products, and their future expectations.
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A demand schedule is a tabular representation of the quantities of a particular commodity or service that consumers are willing and able to purchase at various prices within a specific time period, assuming all other factors remain constant.
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The demand curve is the graphical representation of the demand schedule. The y-axis represents the price of the product, while the x-axis represents the quantity demanded.
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Guide Questions
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What does the Law of Demand state about the relationship between the price of a good and the quantity demanded? Can you provide a real-world example that illustrates this relationship?
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What are the key factors that influence demand other than the price of the good? How does each determinant affect the demand for a product, such as income levels or consumer preferences?
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How is the demand curve typically shaped, and what does its slope indicate about consumer behavior? What happens to the demand curve when there is a change in a determinant of demand, such as an increase in income?
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What is a demand schedule, and how does it relate to the demand curve? How would you construct a demand schedule for a product with different price points?
References
Stigler, G. J. (1966). The Theory of Price. Macmillan.
University of Minnesota Libraries. (2016). 3.1 Demand. https://open.lib.umn.edu/principleseconomics/chapter/3-1-demand/
University of Southern Philippines Foundation. (2023). Law of Demand. University of Southern Philippines Foundation. https://www.studocu.com/ph/document/university-of-southern-philippines-foundation/business-administration/law-of-demand-lecture/47974063