What exactly is “demand” when it comes to economics?
“Demand” can mean a lot of things. One might use it as a verb – “I demand to see you!”. Here demand would mean something along the lines of “to want”. In economics, “demand” is a term that means the amount of goods that consumers desire and can afford to buy over a range of prices.
Note the “over a range of prices” bit – the demand for a particular product encompasses the amount demanded over every price value, not just one of them. For example, the quantity demanded of a soda might be 300 bottles when it costs $2, and 250 bottles at $3. Both of these data pairs are part of the demand for the soda. A good way to think of demand is as a table, with the left column being the price and the right column being the units demanded. When you graph the demand for a product, the prices are always graphed on the y-axis and the units demanded on the x-axis.
Why does demand slope downwards?
Almost every graph of the demand for a product will have a line or curve that slopes downwards. That is, the lower the price you sell it at, the more units will be demanded – and vice-versa. In principle, this is easy to explain – the more a product costs, the less of it a person can afford to buy with the same income. This is the first reason that the demand graph slopes downwards.
Another reason involves two products that consumers can substitute for each other – the classic example here is Coke and Pepsi. Let’s say that the average person spends $3 each day on soda, and Coke and Pepsi each cost $1.50. One would assume that all other things being equal, someone with $3 would buy one Pepsi and one Coke. Now let’s assume Pepsi drops its price to $1 per soda. This will result in someone with $3 buying three Pepsis, because there is more value for money here. Therefore, the quantity demanded for Pepsi will increase as the price falls, because Pepsi will attract consumers away from competing products. This generally holds true for almost all goods.
When does demand slope upwards?
Some products have demand graphs that result in a higher demand for a higher price. Theoretically, this is the holy grail for a business – the higher you price a good, the more of it people will buy!
When would this occur? The classic example is a Rolex watch – people buy these expensive watches precisely because they’re expensive. The same goes for designer clothes, some types of cars, and other such goods – these goods are called “Veblen goods”.
What would change the demand of a good?
Since the demand includes the amount desired by consumers for a range of prices, what would cause a change in the entire demand? That is, what would affect the quantity demanded across every price value?
Well, remember the substitute effect we talked about earlier? Let’s take Coke and Pepsi again. If Coke raises its price then the demand for Pepsi will increase, without Pepsi having taken any action – this is one way the demand for a good can increase. Similarly, the change in price of a complementary good can also affect the demand for your good. (A complementary good is a one that’s often bought together with another good – an example of two complementary goods would be DVD players and DVDs.) A change in the price of one might impact the demand of the other.
A change in the income of consumers would also impact the demand of goods. With a higher income, consumers have more money to spend, and can buy more of a good at every price level.
Finally, the preferences of consumers play a big role in the demand for a product. If your product is looked on favourably by consumers, then they’ll want to buy more of it; this is where advertising comes in.
That’s it for a basic explanation of demand in economics.