What Is Demand? The Consumer's Voice
The Law of Demand and the Downward Slope
At the heart of demand is a simple, observable truth: when the price of an item goes down, people generally want to buy more of it. Conversely, when the price goes up, they want to buy less. This inverse relationship between price and quantity demanded is known as the Law of Demand.
Think about your favorite snack. If a bag of chips costs $5, you might buy one bag a month. If the price drops to $2, you might buy three bags. If it rises to $8, you might skip it entirely. This behavior happens for two main reasons:
The Income Effect: When the price of a good you regularly buy falls, it's as if your purchasing power has increased. You can afford to buy more of that good (or other goods) with the same amount of money.
From Schedules to Curves: Visualizing Demand
Economists use a demand schedule to organize this price-quantity data into a table. A demand schedule for ice cream cones in a small town might look like this:
| Price Per Cone (in $) | Quantity Demanded (Cones per Day) |
|---|---|
| 6.00 | 10 |
| 5.00 | 30 |
| 4.00 | 50 |
| 3.00 | 70 |
| 2.00 | 100 |
We can plot these points on a graph, with price on the vertical (y) axis and quantity on the horizontal (x) axis. Connecting the points creates a demand curve. This curve almost always slopes downward and to the right, visually representing the Law of Demand. The mathematical relationship can be shown as:
$Q_d = f(P)$
Where $Q_d$ is the quantity demanded and $P$ is the price. The "$f(P)$" means "is a function of price," emphasizing that quantity demanded depends on price.
What Makes the Whole Demand Curve Move?
A crucial distinction is between a change in quantity demanded and a change in demand. A change in quantity demanded is movement along the existing demand curve, caused only by a change in the good's own price (like moving from the $5 point to the $3 point on the ice cream curve).
A change in demand is a shift of the entire curve to the left or right. This happens when something other than the good's own price changes, meaning people want to buy more (or less) at every single price point. These are called the determinants of demand:
- Income: For most goods (called normal goods), demand increases when consumer income rises. For inferior goods (like generic brands or bus rides), demand actually decreases when income rises, as people switch to better alternatives.
- Tastes and Preferences: Popularity driven by trends, advertising, or seasons dramatically affects demand. Demand for sunscreen shifts right in summer; demand for wool gloves shifts right in winter.
- Prices of Related Goods:
- Substitutes: Goods that can be used in place of each other (e.g., tea and coffee). If the price of coffee rises, demand for tea increases (shifts right).
- Complements: Goods that are used together (e.g., hot dogs and buns, smartphones and apps). If the price of smartphones falls, demand for phone apps increases (shifts right).
- Number of Buyers: More consumers in a market means higher demand. A town growing in population will see a rightward shift in the demand curve for houses, pizza, and movie tickets.
- Future Expectations: If people expect prices to rise in the future, they will buy more today, shifting current demand to the right. The opposite happens if they expect a future sale.
Elasticity: How Sensitive Is Demand?
Not all demand responds to price changes in the same way. Price Elasticity of Demand measures the responsiveness of quantity demanded to a change in price. It's calculated as:
Based on this formula, we categorize demand:
| Type of Elasticity | If Price Rises 10%... | Value of $E_d$ | Example |
|---|---|---|---|
| Elastic Demand | Quantity demanded falls more than 10% | $|E_d| > 1$ | Luxury items, brand-name soda, restaurant meals. Consumers can easily postpone or find substitutes. |
| Inelastic Demand | Quantity demanded falls less than 10% | $|E_d| < 1$ | Medicine, gasoline, basic utilities. These are necessities with few good substitutes, so people buy them even when prices rise. |
| Unit Elastic Demand | Quantity demanded falls exactly 10% | $|E_d| = 1$ | A theoretical midpoint, rarely seen in perfect form in real life. |
A Real-World Case: Streaming Services and Demand
Let's apply these concepts to a modern example: video streaming services like Netflix, Hulu, or Disney+.
The Law of Demand in Action: If one service raises its monthly fee from $15 to $20, we would expect the number of its subscribers (quantity demanded) to decrease, a movement up along its demand curve.
Shifts in Demand: • Income: During an economic boom, demand for streaming (a normal good) shifts right as more people can afford it. • Tastes: A service releasing a massively popular original series experiences a rightward demand shift. • Price of Substitutes: If a competitor lowers its price, demand for the first service shifts left as customers switch. • Price of Complements: If the price of high-speed internet falls, demand for all streaming services shifts right. • Number of Buyers: As more households get internet access, the market demand for streaming shifts right. • Expectations: If a service announces a price hike for next year, some users may subscribe now, causing a temporary rightward demand shift.
Elasticity Considerations: Demand for a specific streaming service is likely elastic ($|E_d| > 1$) because there are many close substitutes (other streaming platforms, cable, free YouTube). A small price increase could cause a large loss of subscribers. However, demand for streaming in general might be more inelastic ($|E_d| < 1$) for dedicated users who see it as an essential entertainment service.
Important Questions
A: "Demand" refers to the entire relationship between price and quantity, represented by the whole demand curve or schedule. "Quantity demanded" refers to a specific amount consumers will buy at a specific price, represented by a single point on the demand curve. A change in the good's own price changes the quantity demanded (movement along the curve). A change in other factors (like income) changes demand itself (shifts the curve).
A: Insulin for diabetics is a classic example. It is a life-saving necessity with no close substitutes. If the price of insulin rises, diabetics cannot simply stop buying it or easily switch to another product. They will likely continue to purchase nearly the same amount despite the higher price, making the quantity demanded very unresponsive—or inelastic—to the price change.
A: The study changes consumer tastes and preferences in favor of blueberries. This means that at every given price, consumers will now be willing to buy a larger quantity of blueberries. This results in an increase in demand, which is graphically shown as a rightward shift of the entire demand curve for blueberries.
Demand is the expression of consumer choice and willingness to pay in the marketplace. From the simple, intuitive Law of Demand to the more nuanced shifts caused by external factors and the measured sensitivity of elasticity, understanding demand is key to deciphering how markets function. It helps explain everyday phenomena—from holiday sales to gas prices—and provides a critical tool for businesses planning their strategies and for policymakers considering the impact of taxes. By mastering the concept of demand, you gain insight into the powerful forces that guide our economic decisions and shape the world of commerce around us.
Footnote
[1] Economics: The social science that studies how individuals, businesses, governments, and nations make choices about allocating scarce resources to satisfy their unlimited wants.
[2] Law of Demand: The economic principle that states, all else being equal, as the price of a good increases, the quantity demanded decreases, and vice versa.
[3] Demand Schedule: A table that shows the quantity of a good or service that consumers are willing and able to purchase at various prices.
[4] Elasticity (Price Elasticity of Demand): A measure of how much the quantity demanded of a good responds to a change in the price of that good, calculated as the percentage change in quantity demanded divided by the percentage change in price.