In economics, demand is the desire to own anything and the ability to pay for it and willingness to pay[1] (see also supply and demand Supply and demand is an economic model of price determination in a market. It concludes that in a competitive market, price will function to equalize the quantity demanded by consumers, and the quantity supplied by producers, resulting in an economic equilibrium of price and quantity). The term demand signifies the ability or the willingness to buy a particular commodity at a given point of time.
Economists record demand on a demand schedule In economics, the demand curve is the graph depicting the relationship between the price of a certain commodity, and the amount of it that consumers are willing and able to purchase at that given price. It is a graphic representation of a demand schedule. The demand curve for all consumers together follows from the demand curve of every individual and plot it on a graph as a demand curve In economics, the demand curve is the graph depicting the relationship between the price of a certain commodity, and the amount of it that consumers are willing and able to purchase at that given price. It is a graphic representation of a demand schedule. The demand curve for all consumers together follows from the demand curve of every individual that is usually downward sloping. The downward slope reflects the relationship between price and quantity demanded: as price decreases, quantity demanded increases. In principle, each consumer has a demand curve for any product that he or she would consider buying, and the consumer's demand curve is equal to the marginal utility In economics, the marginal utility of a good or service is the utility gained from an increase (or decrease) in the consumption of that good or service. In general, preferences display diminishing marginal utility. That is, the first unit of consumption of a good or service yields more utility than the second and subsequent units. The concept of (benefit) curve. When the demand curves of all consumers are added up, the result is the market demand curve for that product. If there are no externalities In economics, an externality is a cost or benefit, not transmitted through prices, incurred by a party who did not agree to the action causing the cost or benefit. A benefit in this case is called a positive externality or external benefit, while a cost is called a negative externality or external cost, the market demand curve is also equal to the social utility Utilitarianism is the idea that the moral worth of an action is determined solely by its contribution to overall utility: that is, its contribution to happiness or pleasure as summed among all people. It is thus a form of consequentialism, meaning that the moral worth of an action is determined by its outcome (benefit) curve.
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Demand schedule
The demand schedule shows the quantity of goods that a consumer would be willing and able to buy at specific prices under the existing circumstances. Some of the more important factors affecting demand are the price of the good, the price of related goods, tastes and preferences, income, and consumer expectations.[2]
Factors affecting demand
Innumerable factors and circumstances could affect a buyer's willingness or ability to buy a good. Some of the more common factors are:
- Good's own price:The basic demand relationship is between potential prices of a good and the quantities that would be purchased at those prices.[3] Generally the relationship is negative meaning that an increase in price will induce a decrease in the quantity demanded. This negative relationship is embodied in the downward slope of the consumer demand curve. The assumption of a negative relationship is reasonable and intuitive. If the price of a new novel is high, a person might decide to borrow the book from the public library rather than buy it.[4] Or if the price of a new piece of equipment is high a firm may decide to repair existing equipment rather than replacing it.
- Price of related goods: The principal related goods are complements and substitutes. A complement is a good that is used with the primary good.[5] Examples include hotdogs and mustard, beer and pretzels, automobiles and gasoline. (Perfect complements behave as a single good.) If the price of the complement goes up the quantity demanded of the other good goes down.[6] Mathematically, the variable representing the price of the complementary good would have a negative coefficient in the demand function. For example, Qd = a - P - Pg where Q is the quantity of automobiles demanded, P is the price of automobiles and Pg is the price of gasoline. The other main category of related goods are substitutes. Substitutes are goods that can be used in place of the primary good. The mathematical relationship between the price of the substitute and the demand for the good in question is positive. If the price of the substitute goes down the demand for the good in question goes down.[7]
- Income: In most cases, the more income you have the more likely you are to buy a good.[8]
- Tastes or preferences:The greater the desire to own a good the more likely you are to buy the good.[9] There is a basic distinction between desire and demand. Desire is a measure of the willingness to buy a good based on its intrinsic qualities. Demand is the willingness and ability to put one's desires into effect. It is assumed that tastes and preferences are relatively constant.
- Consumer expectations about future prices and income: If a consumer believes that the price of the good will be higher in the future he is more likely to purchase the good now. If the consumer expects that her income will be higher in the future the consumer may buy the good now. In other words positive expectations about future income may encourage present consumption.[10]
- This list is not exhaustive. All facts and circumstances that a buyer finds relevant to his willingness or ability to buy goods can affect demand. For example, a person caught in an unexpected storm is more likely to buy an umbrella than if the weather were bright and sunny.
Demand function and demand equation
The demand equation is the mathematical expression of the relationship between the quantity of a good demanded and those factors that affect the willingness and ability of a consumer to buy the good. For example, Qd = f(P; Prg, Y) is a demand equation where Qd is the quantity of a good demanded, P is the price of the good, Prg is the price of a related good, and Y is income; the function on the right side of the equation is called the demand function. The semi-colon in the list of arguments in the demand function means that the variables to the right are being held constant as we plot the demand curve in (quantity, price) space. A simple example of a demand equation is Qd = 325 - P - 30Prg + 1.4Y. Here 325 is the repository of all relevant non-specified factors that affect demand for the product. P is the price of the good. The coefficient is negative in accordance with the law of demand. The related good may be either a complement or a substitute. If a complement, the coefficient of its price would be negative as in this example. If a substitute, the coefficient of its price would be positive. Income, Y, has a positive coefficient indicating that the good is a normal good In economics, normal goods are any goods for which demand increases when income increases and falls when income decreases but price remains constant, i.e. with a positive income elasticity of demand. The term does not necessarily refer to the quality of the good. If the coefficient was negative the good in question would be an inferior good meaning that the demand for the good would fall as the consumer's income increased. Specifying values for the non price determinants, Prg = 4.00 and Y = 50, results in the demand equation Q = 325 - P - 30(4) +1.4(50) or Q = 275 - P. If income were to increase to 55 the new demand equation would be Q = 282 - P. Graphically this change in a non price determinant of demand would be reflected in an outward shift of the demand function caused by a change in the x intercept.
Demand curve
The relationship of price and quantity demanded can be exhibited graphically as the demand curve. The curve is generally negatively sloped. The curve is two-dimensional and depicts the relationship between two variables only: price and quantity demanded. All other factors affecting demand are held constant. However, these factors are part of the demand curve and influence the location of the curve. In many economics graphs, such as that of the demand curve, the independent variable is plotted on the vertical axis and the dependent variable on the horizontal axis. Consequently, the graphical presentation is technically that of the equation P = f(Q) where f(Q) is the inverse demand function, although the graph is referred to simply as the demand curve.
Discrete goods
In some cases it is impractical to represent the relationship between price and demand with a continuous curve because of small quantities demanded. Goods and services measured in small units are best represented with a smooth curve. Examples include food measured in calories and leisure measured in minutes. However, when the price of a good is very high in proportion to a consumer's budget there is a need to incorporate this limitation in both the mathematical analysis and the graph representing the relationship. While cars An automobile, motor car or car is a wheeled motor vehicle used for transporting passengers, which also carries its own engine or motor. Most definitions of the term specify that automobiles are designed to run primarily on roads, to have seating for one to eight people, to typically have four wheels, and to be constructed principally for the and houses A house is a home, shelter, building or structure that is a dwelling or place for habitation by human beings. The term includes many kinds of dwellings ranging from rudimentary huts of nomadic tribes to free standing individual structures. In some contexts, "house" may mean the same as dwelling, residence, home, abode, lodging, are discrete goods for most people, cheaper goods such as glasses Glasses are frames bearing lenses worn in front of the eyes, normally for vision correction, eye protection, or for protection from UV rays and bicycles A bicycle, also known as a bike, pushbike or cycle, is a pedal-driven, human-powered, single-track vehicle, having two wheels attached to a frame, one behind the other. A person who rides a bicycle is called a cyclist or a bicyclist are discrete goods only for the very poor The poverty threshold, or poverty line, is the minimum level of income deemed necessary to achieve an adequate standard of living in a given country. In practice, like the definition of poverty, the official or common understanding of the poverty line is significantly higher in developed countries than in developing countries. On the national level, nuclear power plants Nuclear power is power produced from controlled (i.e., non-explosive) nuclear reactions. Commercial plants in use to date use nuclear fission reactions. Electric utility reactors heat water to produce steam, which is then used to generate electricity. In 2007, 14% of the world's electricity came from nuclear power, despite concerns about safety or space stations To date, only low earth orbital stations have been implemented, otherwise known as orbital stations. A space station is distinguished from other manned spacecraft by its lack of major propulsion or landing facilities—instead, other vehicles are used as transport to and from the station. Space stations are designed for medium-term living in orbit, may be considered discrete goods. The concept is more useful at the individual consumer's level than at the consumers' aggregate level, because for example the difference between 3,000,000 cars demanded and 3,000,001 cars demanded is so little that the market demand for cars can be viewed as essentially continuous.
The demand curve in the discrete case
The price where the consumer is indifferent between buying an extra unit and not buying an extra unit is called the reservation price In microeconomics, the reservation price is the maximum price a buyer is willing to pay for a good or service; or, conversely, the minimum price at which a seller is willing to sell a good or service. Reservation prices are commonly used in auctions (r) after the same term used in auctions An auction is a process of buying and selling goods or services by offering them up for bid, taking bids, and then selling the item to the highest bidder. In economic theory, an auction may refer to any mechanism or set of trading rules for exchange. If p is the price of the good and n units of the good are demanded, then rn>=p>=rn+1. For example, John is considering whether to buy a car or not (n=0 or n=1). The price of the car is $15,000 (p=15,000). The determining factor in John's consumption choice is his reservation price, r, simply the maximum price he is willing to pay for the car, reflecting his preferences. If John purchases this car and only this car then r1>=15,000>=r2 but if he does not purchase the car then r0>=15,000>=r1.
As with other demand curves, discrete demand curves are usually downward sloping, but in the case of discrete goods the curve is shaped like a staircase, reflecting the properties of goods which can only be consumed in quantities of integers The integers are formed by the natural numbers including 0 (0, 1, 2, 3, ...) together with the negatives of the non-zero natural numbers (−1, −2, −3, ...). Viewed as a subset of the real numbers, they are numbers that can be written without a fractional or decimal component, and fall within the set {... −2, −1, 0, 1, 2, ...}. For example,. The horizontal line segments represent prices at which the consumer is indifferent between buying an extra unit or not. The vertical line segments represent ranges of prices where the quantity demanded does not vary. Nevertheless, as prices change within these ranges, the consumer surplus The term surplus is used in economics for several related quantities. The consumer surplus is the amount that consumers benefit by being able to purchase a product for a price that is less than the most that they would be willing to pay. The producer surplus is the amount that producers benefit by selling at a market price mechanism that is higher may change.
Movements versus shifts
The demand curve is a two-dimensional depiction of the relationship between price and quantity demanded. Movements along the curve occur only if there is a change in quantity demanded caused by a change in the good's own price. A shift in the demand curve, referred to as a change in demand, occurs only if a non-price determinant of demand changes. For example, if the price of a complement were to increase, the demand curve would shift leftward reflecting a decrease in demand. The shifted demand curve represents a new demand equation.
Movement along a demand curve due to a change in the good's price results in a change in the quantity demanded, not a change in demand. A change in demand refers to a shift in the position of the demand curve in two-dimensional space resulting from a change in one of the other arguments of the demand function.
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on the role of this sector in driving summer peak demands suggest that commercial buildings account for 330 coincident GW which is 45 of the total for the entire U S summer peak demand Demand profile of The New York Times Headquarters under the best demand response control sequence Source NaturalWorks
