Demand in Economics – Further Discussion

By Anne Alexander

As you’ve read in your text, quantity demanded is the amount of a good a person is willing and able to buy at a certain price. A demand curve can be drawn to represent that person’s quantity demanded for various prices, given that certain other factors which influence a person’s willingness and ability to pay stay constant. This demand curve shows ONLY how much of a good a person will buy for various prices given that everything else about the world does not change. That is, all other determinants of demand are held constant (ceteris paribus). A demand curve is also just a visual representation of a person’s demand schedule.

A demand curve is like a photo of a person’s willingness to pay for a good at a point in time. The position of the demand curve indicates just a person feels about a good. Thus, demand is also sometimes referred to as "willingness to pay." The further to the right a person’s demand curve is, the more he’s willing to pay for all quantities of the good. This just means that the bigger is a person’s demand for a good, or the stronger is that person’s demand for the good, the higher the demand curve will be. A demand curve that indicates strong preference for the good shows that a person is willing and able to pay higher prices for any quantity of the good.

On the other hand, when a person’s demand is very weak, their demand curve will be further in to the left on the graph. Therefore, when someone’s demand for a good is very low, they will be willing and able to pay lower prices for any quantity of the good.

As an example of how strong versus weak willingness and ability to pay will influence where a demand curve is, think about the demand for rice and beans (Cajun style, of course!) Now, someone from Louisiana would probably really like rice and beans (unless they ate too much of it when they were a kid). A person from Wyoming might not be so fond of this particular dish. Therefore, a Louisianan would be likely to have a strong demand for rice and beans, while a native of Wyoming would have relatively weaker demand for it. This is an example of how tastes and preferences influence the position of demand curves. The Louisianan’s demand curve would be higher than the Wyomingite’s – they would be willing to pay more for rice and beans than a person would from Sheridan.

Even Louisianans would have variations in their demand for rice and beans. This dish is really inexpensive to make. If a Louisianan’s demand for rice and beans was weaker when he was more wealthy than when he was less wealthy, this would mean that rice and beans are an inferior good to him. In this case, his demand would be weaker when he got richer. On the other hand, if rice and beans were a normal good, a wealthy Louisianan might really love rice and beans, and since they have a lot of money would buy a more rice and beans than when they were less wealthy. In this case, the Lousianan would have stronger demand as his income rose. These are some examples of how income can effect the position of the demand curve.

Suppose the price of gumbo, a substitute good to (consumed instead of) rice and beans, were to fall. If this were the case, most people’s demand for rice and beans would fall. This is because as the price of gumbo falls, a larger quantity of gumbo is demanded. Since more of this substitute good is bought, people would tend to consume fewer rice and beans. This gives you an idea of how the price of a substitute effects the position of a demand curve.

Now, what if the price of okra, a complement good to (consumed with) rice and beans, were to fall? Since a lot of people eat okra with rice and beans, this would effect how strong demand for rice and beans would be. If the price of okra falls, then we know the quantity of okra demanded increases. Since people eat okra with rice and beans, people would automatically buy more rice and beans to consume with their extra okra. This shows you how the price of a complement good influences how much people are willing to pay for a good, and therefore the position of the demand curve.

At this point, I cannot emphasize enough that you should know the difference between demand and quantity demanded. Remember that quantity demanded refers to exactly how much of a good you buy at a specific price. Demand refers to your willingness and ability to pay for all quantities of a good. When your demand changes, your entire demand curve shifts, and your willingness and ability to pay completely changes (also called a demand shift)

There’s one interesting thing about demand curves that may help you understand them even better. When we hold income, tastes, expectations, and prices of other goods constant, what exactly determines the price you are willing to pay for a specific amount of a good? In other words, once you factor out the other "ceteris paribus" things, how do you determine the relationship between quantity demanded and the price your willing to pay?

Let’s investigate this question with an example. Consider your demand for compact discs. First, hold your tastes, expectations, and so on constant. Now, you currently own a certain number of CD’s. Without worrying about supply or what going market prices are, consider how you determine the most you’d be willing to pay for the next CD you buy. The way you determine how much you’re willing to pay is by actually considering how much benefit you’d get from buying that CD. You’d consider how much you like the music that will be on it, how often you’d listen to it, and other benefits from buying it. The marginal benefit of the CD determines the most you are willing to pay for it. Therefore, marginal benefits are what determine the relationship between price and quantity of a good. In this case, you’d quantify how much additional benefit you’d derive from the additional CD. That would determine a point on your demand curve. In other words, a demand curve is also a marginal benefit curve.