Demand Schedule & Curve

1.  What is Demand?

2.  Demand Schedule & Demand Curve

3.  Shifts in the Demand Curve

4.  Individual Demand and Market Demand

What is Demand?

In economics demand means effective demand which meets the three crucial characteristics; desire to have a good, willingness to pay for that good and ability to pay for that good. Absence of any of these three characteristics, there is no demand. For example, a teetotaler professor may posses both the willingness to pay as well as the ability to pay for bottle of liquor, yet he does not have a demand for it. This is because; he does not desire to have that alcoholic drink. Similarly, a businessman might have the desire to have a television, he might be rich enough to be able to pay for it, but if he is not willing to pay for the television, he does not have a demand for this good. Also, a blue collar worker might posses both the desire for the scooter as well as the willingness to pay for it, but if he does not posses enough money to pay for it, he does not have a demand for the scooter. In contrast, to these three situations, a doctor, who has the desire for a car as well as both the will and ability to pay for it, he has demand for a car.

Demand Schedule & Demand Curve

The quantity demanded of a good usually is a strong function of its price. Suppose an experiment is run to determine the quantity demanded of a particular product at different price levels, holding everything else constant. Presenting the data in tabular form would result in a demand schedule, an example of which is shown below.

Demand Schedule

Price	Quantity Demanded
5	10
4	17
3	26
2	38
1	53

The demand curve for this example is obtained by plotting the data:

Demand Curve

By convention, the demand curve displays quantity demanded as the independent variable (the x axis) and price as the dependent variable (the y axis).

The law of demand states that quantity demanded moves in the opposite direction of price (all other things held constant), and this effect is observed in the downward slope of the demand curve.

For basic analysis, the demand curve often is approximated as a straight line. A demand function can be written to describe the demand curve. Demand functions for a straight-line demand curve take the following form:

Quantity = a - (b x Price)

where a and b are constants that must be determined for each particular demand curve.

When price changes, the result is a change in quantity demanded as one moves along the demand curve.

Shifts in the Demand Curve

Why Demand Curve Shift?

u   When any of the ceteris Paribas conditions changes, the entire demand curves shifts.

q     Factors of Ceteris Paribas

Ø               Income

Ø               Tastes and preferences

Ø               Prices of related goods and services

Ø               Expectations regarding the future

Ø               Number of buyers

Ø               Climate and weather

When Individual Demand Curve Shift?

u   When an individual’s income rises and everything remain constant, the person’s demand for a commodity usually increases

v    When income increases, the demand curve shifts to the right

v    When income decreases, the demand curve shifts to the left

The demand curve shifts to the left

u   An decrease in consumer’s income

u   an increase in the price of complementary goods

u   The popularity of the product decreased

u   Taste for the product changes negatively

The demand curve shifts to the right

u   An increase in consumer’s income

u   An increase in population / market size

u   An increase in the price of a substitute goods

u   Buyers expect the products price to be much higher in the future 

When there is a change in an influencing factor other than price, there may be a shift in the demand curve to the left or to the right, as the quantity demanded increases or decreases at a given price. For example, if there is a positive news report about the product, the quantity demanded at each price may increase, as demonstrated by the demand curve shifting to the right:

Demand Curve Shift

A number of factors may influence the demand for a product, and changes in one or more of those factors may cause a shift in the demand curve. Some of these demand-shifting factors are:

·         Customer preference

·         Prices of related goods

o        Complements - an increase in the price of a complement reduces demand, shifting the demand curve to the left.

o        Substitutes - an increase in the price of a substitute product increases demand, shifting the demand curve to the right.

·         Income - an increase in income shifts the demand curve of normal goods to the right.

·         Number of potential buyers - an increase in population or market size shifts the demand curve to the right.

·         Expectations of a price change - a news report predicting higher prices in the future can increase the current demand as customers increase the quantity they purchase in anticipation of the price change.

Individual Demand and Market Demand

The consumer equilibrium condition determines the quantity of each good the individual consumer will demand. As the example above illustrates, the individual consumer's demand for a particular good—call it good X—will satisfy the law of demand and can therefore be depicted by a downward-sloping individual demand curve. The individual consumer, however, is only one of many participants in the market for good X. The market demand curve for good X includes the quantities of good X demanded by all participants in the market for good X. The market demand curve is found by taking the horizontal summation of all individual demand curves. For example, suppose that there were just two consumers in the market for good X, Consumer 1 and Consumer 2. These two consumers have different individual demand curves corresponding to their different preferences for good X. The two individual demand curves are depicted in Figure 1 , along with the market demand curve for good X.

Figure 1: Derivation of the market demand curve from consumers' individual demand curves

The market demand curve for good X is found by summing together the quantities that both consumers demand at each price. For example, at a price of $1, Consumer 1 demands 2 units while Consumer 2 demands 1 unit; so, the market demand is 2 + 1 = 3 units of good X. In more general settings, where there are more than two consumers in the market for some good, the same principle continues to apply; the market demand curve would be the horizontal summation of all the market participants' individual demand curves.