Supply and Demand


Demand describes the desire and ability of consumers to purchase a good at a range of different prices.

Demand is the desire and ability of consumers for a good at a range of prices. Demand describes the behavior of individual consumers and markets made up of many consumers. A market is a group of buyers and sellers of a particular good or service. One person may buy a large quantity of an item when it is inexpensive and less of that item when the price is higher. A demand schedule is a table showing the quantity demanded of a good at different prices and can also be used to show the maximum price that a consumer would be willing to pay. Other people (e.g., persons with more or less disposable income or persons with different shopping priorities) may buy different quantities of an item at the same prices. Taken together, all consumers interested in purchasing the same item constitute a market, and the quantity of items they demand constitutes market demand.

Consider a market made up of three individuals: Christina, Michael, and Maria. For any particular price that donuts might have in that market, each person will buy a different quantity of donuts. Suppose donuts range in price from $1 to $5. Suppose also that Michael has an insatiable desire for donuts and buys three times as many as Christina does at every price point. Maria enjoys donuts, but she is also quite frugal, and she buys half as many as Christina at every price point. If Christina will buy 10 donuts at $1 per donut, then Michael will buy 30 at that price point and Maria will buy 5. The number of items demanded by all three persons taken together is the market demand, and at $1 each, the market quantity demanded is 45 donuts.
If Christina is only willing to buy 2 donuts at $5 per donut, then Michael will buy 6 and Maria only 1. Therefore, the market demand at $5 per donut is 9 donuts.

Demand for Donuts

Price Christina's Demand Michael's Demand Maria's Demand Market Demand
$1 10 30 5 45
$2 8 24 4 36
$3 6 18 3 27
$4 4 12 2 18
$5 2 6 1 9

The demand schedule for donuts shows the quantity of donuts demanded at different prices for each consumer.

Demand Curve

A demand curve links combinations of prices and quantities demanded for a specific person or market.

Market demand can be represented by a demand curve, which is a graph that shows the relationship between the quantity of a good or service consumers are willing and able to buy at various prices. (The word curve here means a line on a graph showing the relationship between two variables.) The demand curve illustrates the relationship between quantity demanded for a good and the price set for that good in the market, much like a demand schedule, but over a continuous span instead of a set of particular price points. A demand curve shows the quantity of a product consumers are willing to purchase (the market demand) at each possible price. The vertical axis indicates price, and the horizontal axis indicates the quantity demanded. There is an inverse relationship between price and quantity demanded, thus the demand curve has a downward or inverse slope.

To find a point on the curve, draw a horizontal line from a price point on the vertical axis to the curve. Draw a vertical line from that point on the curve down to the horizontal axis to find the quantity demanded. This method can be used to estimate the quantity that will be demanded at prices anywhere along the curve, not just at the prices listed in a demand schedule. For example, a demand curve could be used to estimate how a certain price increase will affect the market quantity demanded. Constructing estimated demand curves is important for firms (business entities that produce a good or service) when they are setting prices for their products.
The demand curve (D) shows the quantity of a product consumers demand at each possible price. The vertical axis indicates price, and the horizontal axis indicates the quantity demanded. The curve shows the inverse relationship between price and quantity demanded: when price is higher, the quantity demanded is lower.

Quantity Demanded

Quantity demanded is the quantity of a good that consumers are willing and able to buy at a specific price.

Demand and quantity demanded are not the same. Demand refers to the overall buying behavior of consumers, whereas quantity demanded is the quantity of a good or service that consumers are willing and able to buy at a specific price. This can differ from an individual consumer to the market as a whole. If a loaf of wheat bread is $4, some consumers will buy two. If the price of the same loaf goes down to $2, the same consumers may buy three loaves. The quantity demanded is different at each price point.

A change in quantity demanded is shown as a movement along the demand curve; for example, when the price decreases for a loaf of bread there is a movement from one point to another along the demand curve for bread. All other factors that influence consumers' purchasing decisions are held constant. This is called the ceteris paribus assumption. Ceteris paribus is a Latin phrase meaning "all other things held equal; all other factors or variables held constant."

A change in demand, in contrast, is shown by a shift of the whole curve. In this case, if the market changes so do purchasing plans; for example, if consumer's income, tastes, or expectations change these can cause shifts of the entire demand curve. During times of economic expansion, as in the United States in the 1990s, the quantity demanded increased. If demand increases, the curve shifts to the right, representing a new combination of prices and quantities demanded. If demand decreases, the curve shifts to the left. Changes in demand occur when some factor other than price, such as a fragile political climate, influences consumers' purchasing decisions.

Law of Demand

The law of demand states price and quantity demanded are inversely related. As the price rises the quantity demanded falls, and when the price falls the quantity demanded rises, all other factors held constant.

The law of demand, an economic law stating that as the price of a good decreases the quantity demanded by consumers will increase, all other things being equal, explains why the demand curve slopes downward. When the price of a good is increased, consumers will buy less; when the price is lowered, consumers will buy more. The relationship is inversely related. If avocados rise in price from $2 to $3 each, the quantity demanded will decrease because consumers may not being willing or able to buy as much when prices rise.

Consumers prioritize goods differently. For example, someone who is an enthusiastic collector of new artwork or antique cars will be prepared to buy several pieces of art or antique cars at higher prices, while another consumer might only require a single piece of artwork or one antique car for occasional use. When prices fall, consumers who attach less importance to a good will be tempted to buy it. For many goods, price increases are a form of rationing; thus, only consumers who have a strong desire for the product purchase it.