Demand and Supply: Market Demand

Consider the market for milk. On the side of demand there are millions of milk buying people, while on the supply side you’ll find thousands of milk producing farms, all competing with each other for sales. The number of buyers is so large that not one of them can affect the price by her own action, and the same holds true for the number of sellers. The product, milk, is standardized or uniform: Milk is milk; without any gradation or other product characteristics. The market’s demand for milk is the sum total of individual demand, which in turn is explained by consumer behavior. We shall skip these matters here and accept the common sense proposition that, other things being equal, the lower the price of milk the more of it will be purchased and conversely, the higher the price of milk the less it will be purchased. The same holds true for other commodities.

Demand is a schedule that shows how much milk will be purchased at different prices. It is not a point. Thus, the statement that demand for cars during a given year was 16 million (because that many cars were sold) is wrong. Rather the demand for cars is a schedule that shows how many cars will be sold at various prices.

Now, consider a simplified version of a hypothetical demand schedule for milk, with only three prices and related quantities purchased. Table 1 shows hypothetical price and quantity numbers. 

Table 1

The Market Demand for Milk

Point

Price of Milk

(Dollars per Gallon)

Quantity of Milk Purchased

(Millions of Gallons)

A

$1

30

B

$2

20

C

$3

10

As the price of milk rises from point A to B to C, quantity purchased declines. Price and quantity purchased move in opposite directions. By multiplying the price by quantity one can see the total amount spent on milk at each of the three points: Point A) $30 million; Point B) $40 million; Point C) $30 million. The most important thing in demand analysis is to distinguish between moving along the schedule, from point C to B to A, and shifting the entire schedule. Moving from point C to B to A describes increases in the quantity purchased. Industries and firms are extremely interested in the response of buyers to price change, or by how much their sales would rise if price declines. The terms increase or decrease in reference to demand is reserved for showing an increase or decrease in the quantity purchased at each and every price. For example, Table 2 shows an increase in the demand for milk relative to Table 1:

Table 2

An Increase in Demand for Milk

Point

Price of Milk

(Dollars per Gallon)

Quantity of Milk Purchased

(Millions of Gallons)

A-1

$1

40

B-1

$2

30

C-1

$3

20

Readers familiar with simple graphics are invited to draw tables 1 and 2 for themselves on a two dimensional diagram; showing price on a vertical axis (by tradition) and quantity on the horizontal axis. The graph of Table 2 lies to the right of that of Table 1. What factors increase or decrease the demand for a product in this sense?

Income: Suppose we are dealing with the market for cars and assume that community income doubled, than at each and every price more cars will be purchased, so demand will rise as in Table 2. Conversely, contraction in income will reduce demand of Table 2 back to Table 1. 

Change in the Price of Substitute Products: Suppose chicken and beef are substitutes in consumption. If the price of beef rises for whatever reason, some consumers will shift their preference to chicken. 

Change in Price of Complementary Products: Suppose suits and ties are complementary goods in a sense that they are worn together. If the price of suits rises the quantity of suits purchased declines as we move along the demand schedule for suits and there is less need for matching ties. The demand for ties declines as the entire demand schedule shifts downward. In sum, change in the price of a substitute product changes the demand for the product in the same direction, while change in the price of complementary products changes demand for the product in the opposite direction.

Anticipation of Future Price Change: Suppose that car manufactures announced their intention to raise the prices of next year models. Such a credible expectation will induce some car buyers to purchase more cars this year to avoid the price increase. The demand for cars will increase. This is a good illustration showing that demand has a time dimension, such as a year.

Change in Taste: A change in consumer taste in favor of a product raises demand for the product, while change in an adverse direction lowers demand for the product.

Change in the Number of Consumers: It will be recalled that market demand is the sum total of individual demand for the product. If the number of consumers in an individual market rises (or falls), the market demand will rise (or fall).

This distinction between movement along the demand schedule and changes in the demand schedule cannot be overemphasized. Movement along the schedule shows a relation between the quantity and price of the product itself. Other factors that affect demand for the product are shown by shifts in the entire schedule.

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Mordechai E. Kreinin

Mordechai E. Kreinin

Mordechai Kreinin is a University Distinguished Professor of Economics, emeritus at Michigan State University and past President of the International Trade and Finance Association. He is the author of about 200 articles and books about economics, including the widely used text, International Economics. He can be reached at kreinin@msu.edu or by cell phone at (517) 488-4837

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