Demand in Economics

Caroline Ntara, Kallie Wells, Joseph Shinn
  • Author
    Caroline Ntara

    Caroline Ntara has over 10 years of experience teaching Economics and Business courses at high school, college and university levels. She is finalizing a Doctorate in International Trade and Business at Monarch Business School Switzerland. She has an MBA in International Business and a bachelor's degree in Economics. Her certifications include CPA and TEFL/TESOL.

  • Instructor
    Kallie Wells

    Kallie has a B.S. in Agribusiness and minor in Statistics from California Polytechnic State University, San Luis Obispo and M.S. in Agricultural and Resource Economics from University of California, Davis. She has extensive experience designing and performing economic analysis of wholesale energy markets and investigations of market participant behavior within these markets.

  • Expert Contributor
    Joseph Shinn

    Joe has a PhD in Economics from Temple University and has been teaching college-level courses for 10 years.

Learn about the demand curve and how the law of demand works with examples. See the demand definition, diagrams, and explanations. Updated: 09/23/2021

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What is Demand in Economics

In economics, demand refers to the willingness and ability of a consumer to buy goods and services at a specific price. Economists use the term demand to indicate that consumers need particular goods or services and are willing to buy them at the price they are at the time of demand. The relationship between demand and prices of commodities is inversely proportional. When other factors are constant, an increase in prices of goods and services will reduce their demand, and the price decrease of the same commodities will increase the demand.

The supply and demand relationship refers to the number of products companies are willing to produce at certain prices and the quantity of the products consumers wish to purchase at those prices. This relationship is what determines the market prices for the product. Market equilibrium is a state where the prices become stable due to the market's balance between demand and supply.

An aggregate market is an economic model that analyzes aspects like inflation, gross production, and unemployment to understand prices and output. This model also examines the interactions between buyers and sellers to explain issues like inflation and unemployment.

There are many factors that affect demand such as:

  • price of the product
  • consumer expectations
  • consumer's income
  • preferences of customers
  • the number of clients in the market

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Law of Demand

The law of demand states that the higher the prices of commodities, the less the demand for the commodities. This law depicts the relationship between prices and demand, where the demand for a product decreases when the price for that product increases. The law of demand works by relating two aspects of the market: price and quantity of demand. This law is vital since it assists the management in determining which prices are desirable in the market by either increasing or decreasing them. A demand schedule presents the number of commodities demanded at various price levels in a table form. This tabulation can be graphed into a continuous demand curve where the Price (P) is plotted against Quantity (Q).

The demand curve represents the relationship between prices and the number of commodities for a specific time in a graph. The demand curve slopes downward for most goods when the prices of these goods are lowered and the demand grows. The primary assumption surrounding a demand curve is that no other vital economic factors change except the prices of the commodities. Other assumptions include clients' preferences remaining the same, and that the income of the consumers does not change. Assume the prices of coffee go up, consumers will buy less coffee and substitute it with another, lesser-priced beverage. As a consequence, the demand for coffee will fall. This situation refers to the law of demand where prices affect demand, and since the prices are high, the demand quantity is reduced. In drawing a graph representing the demand curve of coffee, the prices will be on the y axis while the demand quantity will be on the x-axis. The resulting curve will be a falling curve of the demand quantity of coffee.

An example of the demand curve.

Demand curve

There are two main classifications of demand. Elastic demand happens when there is a considerable change in the quantity demand when other factors change, such as the price of coffee in the example above. Inelastic demand refers to a slight or no change in quantity demand when other factors change.

Examples of elastic demand:

  • food and beverages
  • automobiles
  • appliances

Examples of inelastic demand:

  • prescription drugs
  • tobacco
  • gas
  • utilities

Organizations use the law of demand to determine the demand level of their commodities. During the expansion and peak phases, companies can increase the prices of their products since the demand is high. But during the contraction and trough phases, the companies are expected to lower their prices since the demand for their commodities is low.

Fiscal policy measures are steps the government takes to stabilize the economy. They include manipulating the taxes and government spending. These measures are taken so that there is an impact on the aggregate demand. Therefore, when the government influences the cumulative demand, there can be stability in prices in the market, or rather a market equilibrium.

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Demand in Economics: Additional Practice

For each of the following, determine the potential impact on the demand curve. Your answer should include why you believe this is the case. Note that it's possible that there may be no impact on the demand curve.

  1. In the market for beach chairs, there is an increase in the price.
  2. In the market for food truck products, there is an increase in the population of the surrounding area.
  3. In the market for notebooks, the cost of the paper used in the notebook rises, making them more expensive to produce.
  4. Apples and oranges are substitutes. What will be the impact on the demand for apples if the price of oranges increases?
  5. A news report comes out that states that eating an apple a day doesn't actually keep the doctor away. What will be the impact on the demand for apples?
  6. In the market for pizzas, what will be the impact on demand if a new pizza shop opens in your town?
  7. Peanut butter and jelly are complements. What will be the impact on the demand for peanut butter if the price of jelly rises.
  8. The government imposes a price floor (a minimum price that can be charged) in the market for wheat. What impact will this have on the demand for wheat?

Answers:

  1. There would be movement along the curve.
  2. Demand will increase.
  3. There will be no impact on demand.
  4. The demand for apples will increase.
  5. The demand for apples will decrease.
  6. There will be no impact on demand.
  7. The demand for peanut butter will decrease.
  8. There will be movement along the demand curve.

What is an example of a demand?

Amanda loves coffee and is willing to go to the same coffee shop every morning to make her purchase. The ability and willingness to buy coffee from a beverage shop at a given price is demand.

What is demand according to economics?

Demand can be defined as the ability and willingness of an individual to buy a good or service of their choice at any one given price.

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