Demand

8 Key excerpts on "Demand"

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  eBook - ePub

  Introductory Economics

  • Arleen J Hoag, John H Hoag(Authors)
  • 2006(Publication Date)
  • WSPC

    (Publisher)

  This certainly does not fit our description of scarcity and the real world. Then there are people convinced that Demand is what we actually get. If there are six pairs of socks under the Christmas tree, that must be Demand, or so they believe. They see Demand as a certain amount. In fact, Demand is neither what we want nor what we actually get. Since Demand is a word in frequent use outside of economics, the word has taken on many different meanings. No wonder when Demand is applied to economic situations, it is often misunderstood. Demand is a list or schedule of all alternative (different) quantities of a particular good that a buyer would be willing and able to buy at alternative prices. Several observations should be made about the definition of Demand. One critical observation is that because the focus of Demand is on the price and the quantity, Demand is studied at a point in time when all other considerations are frozen; frozen, that is, in the sense of not having enough time to change. If other considerations besides price change, we cannot tell whether the change in the quantity was due to price or to other considerations. The idea of Demand is to see how the buyer reacts to a change in price. So those other considerations are frozen and will be discussed later. For now, the only thing changing that can affect the quantity is price. Another observation is that Demand reflects both willingness and ability. A consumer may have enough money but may not be willing to buy the good. Or a consumer may want the good but may not have enough money. So not only must the consumer want the good; the consumer must also have the financial ability to pay the price. The price is the opportunity cost, for convenience measured in money terms. The final observation is to consider who is the Demander. When you think of Demand, think buyer. Demand represents buyer choice, not seller choice. In fact it makes no difference whether there are many, few, or any sellers of that good

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  eBook - ePub

  Media Economics

  Applying Economics to New and Traditional Media

  • Colin Hoskins, Stuart M. McFadyen, Adam Finn(Authors)
  • 2004(Publication Date)
  • SAGE Publications, Inc

    (Publisher)

  Individual Demand is how much one person or household wishes to buy. Market Demand is the total amount all people in the market wish to purchase and is the sum of the Demands by individuals. In this chapter, we will concentrate on market Demand. Demand is not just a want; it concerns what will actually be bought at different prices and hence is a wish backed by willingness and ability to pay. Buying a product has an opportunity cost, sacrificing consumption of another good that could be bought instead. Thus wanting or even “needing” a good does not constitute Demand unless this sacrifice of the next best alternative is acceptable. The market Demand for a given good or service will typically vary with the product’s own price, the prices of Demand-related products, the level of per capita (per person) income, the number of potential buyers in the market, expected future prices, and the tastes of consumers. In this chapter, we will examine the effect of (the product’s) own price on the quantity Demanded of the good, assuming for now that the values of these other determinants of Demand are given and unchanged. 2.1.1 How Does the Quantity Demanded Vary With Price? When we refer to a price change in this and other chapters, we are referring to a change in the price of a specific good relative to other goods. Thus an absolute increase in the price of newspapers by 5% is not a price change in this sense if the prices of all other goods increased by 5% also. Other things being equal, the higher the price, the smaller the quantity Demanded. Equivalently, the lower the price, the greater the quantity Demanded. This is known as the Law of Demand. The major reason for the Law of Demand is the Substitution Effect resulting from the change in relative prices. An increase in the price of a good will make it a less attractive purchase relative to substitute goods whose prices are unchanged. Some people will thus switch to purchasing one of the substitutes. All goods have substitutes

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  eBook - ePub

  Social Valuation in Agricultural Policy Analysis

  Its Significance for Sub-Saharan Africa

  • Matthew Okai(Author)
  • 2019(Publication Date)
  • Routledge

    (Publisher)

  Another area of Demand theory which originated from the budget studies was pioneered by Ernest Engel (1887), a German economist. His analyses considered Demand of a commodity as a function of income only. He demonstrated that Demand of a commodity is a relationship between quantities of an item per unit of time that a consumer will take at various levels of income, while holding prices and other factors constant. Engel’s empirical analyses led to the establishment of the following Engel’s law: i) food is the most important item in the household budget; ii) the proportion of total expenditures allocated to food decreases as income rises; iii) the proportion of total expenditure devoted to clothing and housing is approximately constant, while the share of luxury items increases as income rises.

  Currently the Demand theory in the neoclassical approach is based on the concept of the marginal utility of the goods consumed by consumers who are willing to buy a good until its price is below the utility they receive from its consumption. Changes in relative prices will affect the consumption structure assuming that utility received for each good remains constant. There are different compositions of the basket of goods to which the consumer is indifferent, the maximum possible consumption is determined by the total available income. An increase in disposable income raises the overall consumption as well as (probably) the structure of consumption. The elasticity concept measures changes in the consumption of a good when income increases (income elasticity), when price of goods changes (price elasticity) and the price of other goods changes (cross-price elasticity) (Asuming-Brempong, 1992).

  Consumer Demand

  Traditionally a market is the measure of the number of commodities sold at various prices in a given period of time. A market, therefore, measures a flow of commodities. In order to be able to estimate the present and future flow of commodities and their prices, it is necessary to determine the main probable changes in prices over a given period of time. The Demand of a commodity is defined as the various quantities of it which consumers are willing to purchase per unit time, all other things remaining ceteris paribus

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  Principles of Agricultural Economics

  • Andrew Barkley, Paul W. Barkley(Authors)
  • 2016(Publication Date)
  • Routledge

    (Publisher)

  9Demand

  Plate 9.1 Demand

  Synopsis

  This chapter highlights how consumers respond to changes in prices, income, and other economic variables. The Demand curve is derived that shows the quantity of a good that consumers will purchase at different prices. The pervasiveness and importance of the law of Demand are outlined, and the elasticity of Demand is defined and explained. Demand determinants are discussed in detail, including prices, prices of related goods, income, tastes and preferences, expectations of future prices, and population. Business strategies for agribusinesses are emphasized. Demand, together with supply studied in Chapter 8 , forms the foundation of economics: markets.

  9.0 Introduction

  Chapters 1 –7 describe and explain the behavior of individual economic units (producers). These economic actors use specific methods to locate the optimal point in their economic decisions. Producers select the profit-maximizing combinations of inputs and outputs, and consumers purchase combinations of goods to maximize their own utility or satisfaction. Consumers use similar logic when they decide what to purchase. The decision is based on maximizing satisfaction given income, relative prices, tastes, and a number of other factors. This chapter shows the explicit connection between individuals and markets by deriving market, or aggregate, Demand curves. The chapter also explains the determinants of market Demand, and re-introduces the concept of elasticity, or responsiveness of consumers to changes in prices and other economic conditions. Chapter 10 shows how supply and Demand curves interact to determine the prices and quantities of goods.

  9.1 Demand

  While supply curves stem from the marginal cost curves of individual producers, Demand curves derive from decisions made by consumers when they decide which goods and services to buy. Demand reflects the purchases that consumers make as they strive to maximize utility, given prices and income. Demand is a technical term that describes consumer purchases, or:

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  Intermediate Microeconomics: Neoclassical and Factually-oriented Models

  Neoclassical and Factually-oriented Models

  • Lester O. Bumas(Author)
  • 2015(Publication Date)
  • Routledge

    (Publisher)

    Some economic variables affect buyers and others affect producers. An increase in income allows buyers to purchase more and better products—but has no direct effect on the costs of their production and supply. Technological progress may dramatically change the way a product is made and its cost of production and supply, but that will not change the Demand for it. A related matter is that Demand and supply are generally, but not always, independent of each other. This creates the need to analyze each separately and in isolation from the other. There are few things as disheartening to instructors than finding students asked to confront Demand-side issues slipping their analysis into the realm of supply and vice versa.

  Demand

  The Demand function is defined as:

  Demand is the quantity of a product per unit of time, Q D willingly purchased at various prices, P , all other variables held constant.

  Note that the D in Q D is a superscript which identifies the quantity variable as associated with Demand. Superscripts are used to identify variables particularly if subscripts are set aside for time tags, as P 96 for the price in 1996. If time tags are not used, subscripts are usually used for identification purposes.

  Standard Specifications of Demand and Supply Functions

  Several matters specified with regard to Demand and supply functions warrant attention. (1) The variable “quantity” is generally shorthand for quantity per unit of time . Saying that 60,000 bushels of wheat will be purchased at a price of $4 per bushel just makes no sense. Will this quantity be purchased per hour, day, week, month, or year? The unit of time must be specified. (2) Demand and supply must refer to a standardized or homogeneous product or factor of production. The same supply function, for example, cannot refer to both the most rudimentary Chevy and the most sophisticated Cadillac. (3) In its basic form the quantities supplied and Demanded are functions of price alone. This is because all other relevant variables are held constant—making them shift parameters . (4) Basic Demand and supply functions are static. They only hold true during short durations of time; time periods during which shift parameters do not vary. (5) Supply and Demand functions are really expectational. They cannot tell us how many cars will be bought per month, at various prices, but how many are expected

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  Quantitative Techniques for Competition and Antitrust Analysis

  • Peter Davis, Eliana Garcés(Authors)
  • 2009(Publication Date)
  • Princeton University Press

    (Publisher)

  15,000 cars would be at most 1,000. On the other hand, the same total income divided more equally could certainly generate sales of more than 1,000. (For recent work, see, for example, Lewbel (2003) and references therein.)

  1.1.2 Demand Elasticities

  Elasticities in general, and Demand elasticities in particular, turn out to be very important for lots of areas of competition policy. The reason is that the “price elasticity of Demand” provides us with a unit-free measure of the consumer Demand response to a price increase.7 The way in which Demand changes when prices go up will evidently be important for firms when setting prices to maximize profits and that fact makes Demand elasticities an essential part of, for example, merger simulation models.

  1.1.2.1 Definition

  The most useful measurement of the consumer sensitivity to changes in prices is the “own-price” elasticity of Demand. As the name suggests, the own-price elasticity of Demand measures the sensitivity of Demand to a change in the good’s own-price and is defined as

  The Demand elasticity expresses the percentage change in quantity that results from a 1% change in prices. Alfred Marshall introduced elasticities to economics and noted that one of their great properties is that they are unit free, unlike prices which are measured in currency (e.g., euros per unit) and quantities (sales volumes) which are measured in a unit of quantity per period, e.g., kilograms per year. In our example in figure 1.1 the Demand elasticity for a price increase of 10 leading to a quantity decrease of 5 from the baseline position, where P = 60 and Q = 20, is

  ηjj

  = (−5/20)/(10/60) = −1.5.

  For very small variations in prices, the Demand elasticity can be expressed by using the slope of the Demand curve times the ratio of prices to quantities. A mathematical result establishes that this can also be written as the derivative with respect to the logarithm of price of the log transformation of Demand curve:

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  The Economics You Need

  • Enrico Colombatto(Author)
  • 2016(Publication Date)
  • Routledge

    (Publisher)

  Should one then forget about Demand analysis, given all these caveats and pitfalls? The answer is no. Demand analysis does play an important role in organising our line of thinking and in helping us to distinguish among the different causal mechanisms that induce an individual to modify his behaviour. The fact that tracking the dynamic of Demand is difficult and yields only imperfect results does not mean that understanding its features is useless. For example, one must have some information about the shape of the Demand curve/region in order to assess the effects of a tax (see Chapter 6). Demand analysis explains why governments are inclined to tax goods with steep Demand curves, so that consumers will keep buying the taxed commodity (and pay the tax) – as happens in the case of petrol/gasoline. Similarly, innovative producers strive to guess the shape and the position of the latent Demand for new products, which might be steep (‘price inelastic’, according to the economic jargon) when a successful product is introduced, but might well rotate and become flat (‘price elastic’) as soon as imitations and substitutes follow.

  The thinking tools typical of traditional Demand analysis can also be applied to related domains and contribute powerfully to a better understanding of areas in which common sense and intuition might not suffice. To illustrate this point, the next sections will examine three new issues: intertemporal choices, interest rates and happiness.

  2.6 Intertemporal consumption and the rate of interest

  Demand curves are traditionally conceived in terms of goods and services. This is sensible, since these are the kinds of choices individuals face every day. When individuals engage in consumption, they are fairly aware of what they can afford to spend over a given period (a month, a year), and their task consists in distributing the budget at their disposal across a set of desirable items.

  Yet, the individual's expenditure budget over a given period is itself the result of a choice. For example, one could decide to spend all the money one earns immediately, day after day, month after month. Most frequently, however, current expenditure differs from current income. In particular, it might happen that one wants to consume in excess of his current income and thus plans to cover the difference by borrowing or by drawing on past savings. The opposite might also apply, especially during working years: ‘savings’ is the name assigned to the positive difference between current income and current expenditure.

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  eBook - ePub

  Economics for Investment Decision Makers

  Micro, Macro, and International Economics

  • Christopher D. Piros, Jerald E. Pinto(Authors)
  • 2013(Publication Date)
  • Wiley

    (Publisher)

  CHAPTER 2

  Demand AND SUPPLY ANALYSIS: CONSUMER Demand

  Richard V. Eastin Gary L. Arbogast, CFA

  LEARNING OUTCOMES

  After completing this chapter, you will be able to do the following:

  • Describe consumer choice theory and utility theory.
  • Describe the use of indifference curves, opportunity sets, and budget constraints in decision making.
  • Calculate and interpret a budget constraint.
  • Determine a consumer’s equilibrium bundle of goods based on utility analysis.
  • Compare substitution and income effects.
  • Distinguish between normal goods and inferior goods, and explain Giffen goods and Veblen goods in this context.

  1. INTRODUCTION

  By now it should be clear that economists are model builders. In the previous chapter, we examined one of their most fundamental models, the model of Demand and supply. And as we have seen, models begin with simplifying assumptions and then find the implications that can then be compared to real-world observations as a test of the model’s usefulness. In the model of Demand and supply, we assumed the existence of a Demand curve and a supply curve, as well as their respective negative and positive slopes. That simple model yielded some very powerful implications about how markets work, but we can delve even more deeply to explore the underpinnings of Demand and supply. In this chapter, we examine the theory of the consumer as a way of understanding where consumer Demand curves originate. In a subsequent chapter, the origins of the supply curve are sought in presenting the theory of the firm.

  This chapter is organized as follows: Section 2 describes consumer choice theory in more detail. Section 3 introduces utility theory, a building block of consumer choice theory that provides a quantitative model for a consumer’s preferences and tastes. Section 4 surveys budget constraints and opportunity sets. Section 5 covers the determination of the consumer’s bundle of goods and how that may change in response to changes in income and prices. Section 6 examines substitution and income effects for different types of goods. A summary and practice problems conclude the chapter.

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