MODULE 3 SUPPLY AND DEMAND Demand Learning Objectives Describe demand, the law of demand, and the factors that shift demand. Quantity demanded is the amount of a good or service consumers are willing and able to buy at a specific price during a certain time period. For example, how many donuts would you buy today if the price of a donut were $1? Your answer is your quantity demanded at a price of $1. Demand is the relationship between the quantities demanded of a good or service at various prices over a certain time period. It is important to recognize that a consumer’s demand is not the same as needs or wants, which can be measured in some social or biological way. Need is a concept reserved for policy makers and political decision making. For needs and wants to be demands, they must reflect what people will actually do when confronted with different prices. Many things affect the demand for a good or service. As you well know, price is a very important determinant of demand. Thus, we focus first on what happens when the price of a good or service changes relative to the prices of other goods and services. While looking at the relationship between price and quantity demanded, economists hold constant everything else that affects demand. The law of demand states that the quantity demanded of a good or service in a given time period is negatively related to its price, ceteris paribus . So, if everything else is held constant, consumers will purchase more of a good or service at a lower price than at a higher price. As price rises, ceteris paribus, consumers will purchase less of a good or service because its opportunity cost in terms of other goods is higher. Note that we are saying that quantity demanded—not demand—is a function of price. This distinction is critical. Demand refers to a whole set of price–quantity combinations, whereas quantity demanded is the amount consumers want to buy at a particular price. A demand schedule shows the various quantities demanded at various prices during a specified period of time. How can we generate a demand schedule for an individual? We could develop Judy’s demand schedule for potato chips by suggesting various prices and asking her how many bags of potato chips she would buy per week at each price. Actual experiments with a variety of subjects support the validity of the law of demand. The demand schedule in Table 3.1 shows Fred’s demand for donuts. As price falls, Fred chooses to consume larger quantities of donuts per week, substituting donuts for other items he might purchase. Table 3.1 is consistent with the law of demand because Fred demands larger quantities of donuts at lower prices. Note that there is a time dimension—a week. We cannot determine how many donuts Fred will buy without specifying a time frame—per day, per week, per month, per year, or per lifetime.