What is demand? How does it operates ?
Demand Schedule: Definition and Real Life
Example
The demand curve is a visual
representation of how many units of a good or service will be bought at each
possible price. It plots the relationship between quantity and price that's
been calculated on the demand schedule. That's a table that shows
exactly how many units of a good or service will be purchased at various
prices.
As you
can see in the chart, the price is on the vertical (y) axis and the quantity is
on the horizontal (x) axis.
This
chart plots the conventional relationship between price and quantity. The lower
the price, the higher the quantity demanded. As the price decreases from
p0 to p1, the quantity increases from q0 to q1.
This relationship
follows the law of demand. It states that the
quantity demanded will drop as the price rises, ceteris paribus, or "all other things being equal."
The
relationship between quantity and price will follow the demand curve as long as
the four determinants of
demand don't
change These determinants are:
- Price of related goods or
services.
- Income of the buyer.
- Tastes or preferences of the
buyer,
- Expectation of the buyer,
especially about future prices.
If any of
these four determinants change, the entire demand
curve shifts. That's
because a new demand schedule must be created to show the changed relationship
between price and quantity.
Demand
curves are also used to show the relationship between quantity and price
in aggregate demand.
That's
the total demand in a society. It has the same determinants of demand,
plus the number of potential buyers in the market.
Types of Demand Curves
The
demand curve plots the demand schedule on a graph. The shape of the curve will
tell you how much price affects demand for a product.
If a drop
in price causes a significant increase in quantities bought, the curve looks
flat.
This is
known as elastic demand. Like a stretchy rubber band,
the quantity demanded moves a lot with just a little change in prices. An
example of this would be ground beef. If prices drop just 25 percent, you might
buy three times as much as you usually would. That's because you know you'll
use it and you'll just put the extra in the freezer.
If the
curve looks steep and narrow, then demand is inelastic. That's because a drop in
price won't increase the quantities purchased. An example of this is
bananas. No matter how cheap they are, there's only so many you can eat before
they spoil. Freezing them changes them. You won't buy three bunches even if the
price falls 25 percent.
The
reason you react more to a sale on ground beef than a sale on bananas is
because of the marginal utility of each additional unit. Marginal utility
refers to the usefulness (utility) of each additional unit the further out on
the margin you go. Because you can freeze ground beef, the third package is
just as good to you as the first. The marginal utility of ground beef is high.
Bananas lose their consistency in the freezer, so their marginal utility is
low.
If any
determinants of demand other than price change, the demand curve shifts.
If demand
increases, the entire curve will move to the right. That means larger
quantities will be demanded at every price. If the entire curve shifts to the
left, it means total demand has dropped for all price levels. For example, if
you just lost your job, you might not buy that third
package of ground beef, even if it is on sale. You might just buy the one
package and be glad it's 25 percent off.
Aggregate or Market Demand Curve
The
market demand curve describes the quantity demanded by the entire market for a
category of goods or services. An example of this is gasoline prices. When the price of oil goes up, all gas stations
must raise their prices to cover their costs. Even if the price drops 50
percent, drivers don’t stock up on extra gas. That's why, when the price
skyrockets from $3.20 to $4.00 a gallon, people get upset.
They
can't cut back their driving to work, school and the grocery store. As a
result, they are forced to pay more for gas. That’s an inelastic aggregate
demand curve. For more, see How Oil Prices
Affect Gas Prices.
High gas
prices lower their incomes for things other than gas.
Income is another determinant of demand. That means the demand curve for other
things they would like to buy, like ice cream, will drop. This is called a
demand shift. In this case, the entire demand curve for ice cream shifts to the
left. Since buyers have less income, they will purchase a lower quantity of ice
cream even if ice cream prices don’t rise.
Comments
Post a Comment