When you learned about the concepts of economics in Chapter 1, you learned that the term ‘demand’ is used to describe the amount of money purchasers are pre- pared to pay for a commodity. The following edited extract from Michael Parkin, Melanie Powell and Kent Mathews (2003) will introduce you to the determinants of demand.
Demand
To demand something, you must:
• Want it
• Be able to afford it
• Have a definite plan to buy it
Wants are the unlimited desires or wishes that people have for goods and services. How many times have you thought that you would like something ‘if only you could afford it’ or
‘if it weren’t so expensive’? When we make choices, scarcity guarantees that many – perhaps most – of our wants will never be satisfied. Demand reflects our plans about which wants to satisfy.
The amount of any particular good or service that consumers plan to buy depends on many factors. The main ones are:
• The price of the good.
• The prices of related goods.
• Income.
• Expected future prices.
• Population.
• Preferences.
Let’s start by modelling the relationship between the quantity demanded and the price of a good. To study this relationship, we hold constant all other influences on consumers’
planned purchases. We can then ask: how does the quantity demanded of the good vary as its price varies?
The law of demand
The law of demand states: Other things remaining the same, the higher the price of a good, the smaller is the quantity demanded . . .
Demand curve and demand schedule
You are now going to study the demand curve, one of two parts of the most important model in economics.
Before going any further, you need to understand a critical distinction between demand and quantity demanded. The term demand refers to the entire relationship between the quantity demanded and the price of a good, illustrated by the demand curve and the demand schedule. The term quantity demanded refers to the exact quantity demanded at a particular price, or a particular point on a demand curve.
Figure 3.1 shows the demand curve for music tapes. A demand curve shows the relationship between the quantity demanded of a good and its price, when all other influences on
consumers’ planned purchases remain the same. The table in Figure 3.1 is the demand schedule for tapes. A demand schedule lists the quantities demanded at each different price, when all the other influences on consumers’ planned purchases – such as the prices of related goods, income, expected future prices, population and preferences remain the same. For example, if the price of a tape is 30 pence, the quantity demanded is 9 million tapes a week. If the price of a tape is £1.50, the quantity demanded is 2 million tapes a week.
The other rows of the table show us the quantities demanded at prices between 60 pence and £1.20.
The demand curve is a graph of the demand schedule with quantity demanded on the horizontal axis and price on the vertical axis. The points on the demand curve labelled a through to e are plotted from the rows of the demand schedule.
Willingness and ability to pay
Another way of looking at the demand curve is as a willingness-and-ability-to-pay curve that measures marginal benefit. It tells us the highest price that someone is willing and able to pay for the last unit bought. If a small quantity is available, the highest price that someone Figure 3.1 The demand curve
Source: Parkin et al. (2003)
Price (pounds per tape)
Quantity (millions of tapes per week)
a 0.30 9
b 0.60 6
c 0.90 4
d 1.20 3
e 1.50 2
is willing and able to pay for one more unit is high. But as the quantity available increases, the marginal benefit of each additional unit falls and the highest price offered falls along the demand curve.
In Figure 3.1, if 9 million tapes are bought each week, the highest price that someone is willing to pay for the 9 millionth tape is 30 pence. But if only 2 million tapes are bought each week, someone is willing to pay £1.50 for the last tape bought.
A change in demand
When any factor that influences buying plans changes, other than the price of the good, there is a change in demand. Figure 3.2 illustrates one such change – an increase in demand.
When demand increases, the demand curve shifts to the right and the quantity demanded
Figure 3.2 An increase in demand Source: adapted from Parkin et al. (2003)
Original demand schedule (Walkman £125)
New demand schedule (Walkman £30) Price
(pounds per tape)
Quantity (millions of tapes per week)
Price (pounds per tape)
Quantity (millions of tapes per week) a
b c d e
0.30 0.60 0.90 1.20 1.50
9 6 4 3 2
a′ b′ c′ d′ e′
0.30 0.60 0.90 1.20 1.50
13 10 8 7 6
is greater at each price. For example, at a price of £1.50 on the original demand curve, the quantity demanded is 2 million tapes per week.
On the new (dashed) demand curve, the quantity demanded is 6 million tapes per week.
The quantity demanded is higher at every price.
Let’s expand the model of demand to look at how these other factors influence demand.
1 Prices of related goods
The quantity of any goods and services that consumers plan to buy depends in part on the price of related goods and services. There are two types: substitutes and complements.
A substitute is a good that can be used in place of another good . . . tapes have many substitutes – mini disks, CDs, radio and television broadcasts and live concerts. If the price of one of these substitutes increases, people economize on its use and buy more tapes . . .
A complement is a good used in conjunction with another good . . . Tapes have comple- ments: Walkmans, tape recorders and stereo tape decks. If the price of one of these complements increases, people buy fewer tapes . . .
2 Income
. . . Other things remaining the same, when income increases, consumers buy more of most goods, and when income decreases, they buy less of most goods . . . Goods for which demand increases as income increases are called normal goods. Goods for which demand decreases when income increases are called inferior goods . . .
3 Expected future prices
If the price of a good is expected to rise in the future, and if the good can be stored, the opportunity cost of obtaining the good for future use is lower now than it will be when the price has increased. So people substitute over time. They buy more of the good before the expected price rise and the demand for the good increases. Similarly, if the price of a good is expected to fall in the future, the opportunity cost of the good in the present is high relative to what is expected. So again, people substitute over time. They buy less of the good before its price is expected to fall, so the demand for the good now decreases.
4 Population
Demand also depends on the size and the age structure of the population. Other things remaining the same, the larger the population, the greater is the demand for all goods and services, and the smaller the population, the smaller is the demand for all goods and services. Also, other things remaining the same, the larger the proportion of the population in a given age group, the greater is the demand for the types of goods and services used by that age group.
5 Preferences
Finally, demand depends on consumer preferences. Preferences are an individual’s attitudes towards and tastes for goods and services . . . Preferences are shaped by past experience, genetic factors, advertising information, religious beliefs, and other cultural and social factors.
Movement along versus a shift of the demand curve
Changes in the factors that influence buyers’ plans cause either a movement along the demand curve or a shift of the demand curve.
Movement along the demand curve
If the price of a good changes but everything else remains the same, there is a movement along the demand curve. For example, if the price of a tape changes from 90 pence to
£1.50, the result is a movement along the demand curve, from point c to point e in Figure 3.1. The negative slope of the demand curve reveals that a decrease in the price of a good or service increases the quantity demanded – the law of demand.
A shift of the demand curve
If the price of a good remains constant but some other influence on buyers’ plans changes, there is a change in demand for that good. We illustrate a change in demand as a shift of the demand curve . . . Figure 3.2 illustrates such a shift . . .
A change in demand versus a change in quantity demanded
A point on the demand curve shows the quantity demanded at a given price. A movement along the demand curve shows a change in the quantity demanded. The entire demand curve shows demand. A shift of the demand curve shows a change in demand.
Having learned about demand, the next activity provides an opportunity to apply the concepts to a health care example.
Activity 3.1
1 Suppose that there is a health promotion programme advocating regular dental check-ups (for which people must pay directly). What do you think would be the effect on quantity demanded, ceteris paribus? Mark this effect on Figure 3.3, labelling it clearly.
Figure 3.3 The demand for dental health checks
2 Suppose that the dental clinic relocates to an area outside the city such that it is far from the majority of the population, ceteris paribus. Mark this effect on Figure 3.3, labelling it clearly.
Feedback
1 The health promotion programme, if effective, will result in an increased preference for dental check-ups. This means that quantity demanded increases at each price level – that is, the demand curve shifts to the right (from D1 to D2 on Figure 3.4).
2 If the clinic becomes more distant from the people then this means that travel to the clinic becomes more expensive in terms of time and transport costs. Travel to the clinic can be considered a complement to the check-up. The increasing cost of travel will result in a decrease in quantity demanded for the check-up at all prices. The demand curve shifts to the left (from D1 to D3 in Figure 3.4).
Activity 3.2
1 Suppose that the price charged for a dental check-up falls, ceteris paribus, from p1 to p2. Mark the effect on Figure 3.5.
2 If people’s income falls, what would be the effect on demand for dental check-ups, ceteris paribus? Again mark the change on Figure 3.5.
Figure 3.4 Changes in the demand for dental health checks
Feedback
1 This fall in price can be represented by a movement along the demand curve. As the demand curve slopes downwards, quantity demanded increases (from q1 to q2 in Figure 3.6).
2 If a dental check-up is a normal good (and you have no reason to believe it is not) then the fall in income will result in a decrease in quantity demanded at all prices. Hence the demand curve shifts to the left (from D1 to D2 in Figure 3.6).
Figure 3.5 The demand for dental health checks
Figure 3.6 Changes in the demand for dental health checks