Meant to be read AFTER Part I
Explorations in Economic Demand, Part II
The Demand Relationship
The DeterminantsEconomists approach the analysis of demand for a product by considering each of the same DETERMINANTS or elements Bob considered in Part I. The elements to consider are
1. Price of the good
2. Taste or level of desire for the product by the buyer
3. Income of the buyer
4. Prices of related products:
substitute products (directly competes with the good in the opinion of the buyer)
complementary products (used with the good in the opinion of the buyer)
5. Future expectations:
expected income of the buyer
expected price of the good.
6. For the total market demand (rather than Bob's individual one) the number of buyers in the market is also a determinant of the amount purchased.
To allow us to think about all of this logically and simply, we imagine each determinant by turn changing while the others do not change. We analyze, for example, a price change by assuming that the other determinants are "given" or fixed. How many pairs of (L-501) jeans will Bob buy at each possible price, if his taste for blue jeans, his income, the prices of sneakers or baggy shorts, and his expectations about future income and prices, do not change? Then, when we understand the impact of price, we consider each of the other DETERMINANTS by itself. When we finish, we will have a convenient tool or framework to consider any combination of determinants at once. Economists call all of the list above except price the NON_PRICE DETERMINANTS or sometimes just the DETERMINANTS of demand.
The Role of PriceEconomists give prices a special place in this analysis. The DEMAND CURVE is defined as the relationship between the price of the good and the amount or quantity the consumer is willing and able to purchase in a specified time period, given constant levels of the other determinants--tastes, income, prices of related goods, expectations, and number of buyers. In the diagram, the line labeled "D" shows a plot of that demand curve, say for blue jean prices and number of pairs demanded. Prices are P (in $) and quantity is Q (in number of product units) on this diagram. At a price of $75 (vertical axis), two pairs are demanded (Q on horizontal axis). As the price P on vertical axis is lowered from $75 to $50, the quantity demanded Q is increased from two pairs to three pairs of blue jeans. Although this price-quantity demanded relationship is obvious to Bob and any other struggling consumer, several formal reasons can be given. Two important explanations are the (1) income effect--as the price per pair is smaller, Bob can buy more pairs with his fixed income without giving up buying other goods, and (2) the substitution effect--that there are other goods that he regards as substitutes for L-501s and when L-501s become more expensive he might switch to wearing other clothes, such as baggy shorts. Diminishing marginal utility might also come into play--as Bob buys more and more pairs of blue jeans, his increase in satisfaction with having yet another new pair falls, so the price he is willing to give up also falls. After a few new pairs, the thrill is gone (or at least it's declining)!
A Word About SupplyThe diagram shows that the equilibruim price Pe at $50 cannot be determined by demand alone. To find the market price, we need to compare the amount consumers will buy to the amount sellers will offer at each price. The sellers choices are shown by the supply curve "S," illustrating that sellers offer more quantity for sale as the price they will receive rises. The reasons for this are in another lesson (to be linked here, but not yet implemented).
Summary to this point:We have learned the elements that are involved in the decision about the quantity of a good consumers will purchase. These are often separated into two categories, (1) the good's PRICE, and (2) the NON_PRICE DETERMINANTS--consumers' tastes, income, prices of related goods, expectations about income and prices, and number of buyers in the market. We have learned that price plays a special role in the way we analyze this--we start by considering various potential prices and the quantities demanded, given a fixed level of the other (non-price) determinants. We have also learned how to show this P-Q relationship in a demand curve. But how do we show the impact of the other (non-price) determinants? This is the subject of Part III.
Maintained by Kim Sosin. Comment via EMail: ksosin at mail.unomaha.edu
Co-Director, UNO Center for Economic Education
Chair, Department of Economics
College of Business Administration
University of Nebraska at Omaha
Omaha, NE 68182