It is important to be able to differentiate between demand,
change in demand, quantity demanded, and change in quantity demanded.
Demand -- Demand
for a good or service results from the willingness and ability of consumers to pay for the good or service. Both conditions
of willingness and ability muct coexist before the good or service has a demand. Willingness is the readiness of consumers
to purchase the good or service and is based on their needs and wants. Ability is the capacity of consumers to pay for
the good or service they wish to buy. We are only able to construct the demand schedule, and subsequently the demand
curve, of good or service that has a demand. For goods or services without demand, that is goods or services that people
are unwilling and/or unable to buy, there is no demand schedule or demand curve. For instance, there is a demand for
pencils on campus. Why? Because students need pencils and since they are priced relatively cheap, students are
willing and able to buy them. And since there is demand for pencils, we will be able to construct a demand schedule
as well as a demand curve for pencils. Is there a demand for Ferraris on campus? Chances are, there isn't any.
Why? Because Ferraris are very expensive, and I doubt very much if people are willing to pay for it. As a matter
of fact, I don't think anyone can afford to pay for one! [ceteris paribus]. And since there is no willingness and/or
ability to pay for this beautiful sports car, we can say that there no demand for Ferraris on campus. With no demand,
there is no demand schedule, and no demand curve.
Price plays an important factor in determining whether or not there
is demand for a particular product. Price will determine if people are willing or able to pay for it. Remember
that if consumers are not willing and/or able to pay for a good or service, then there is no demand for that good or service.
Change in Demand --
Once a good or service has a demand, several factors or conditions can cause the demand to change. A change in demand
means there is an increase or decrease in demand. [Do not confuse change in demand with change in quantity demanded -- Change
in quantity demanded is explained below]. There must first be demand before change in demand. So for goods or
services without demand (like the Ferrari example above), there is no change in demand unless and until demand exist first.
A change in demand will cause the demand curve to shift either to
the right or to the left of its original position. A shift to the right shows an increase in demand and a shift to the
left shows a decrease in demand. What causes demand to change? There are several factors. One is change in income. When consumers' income changes then their willingness and ability to pay for goods
or services also changes. Hence they may be willing to buy more, or less. Let's take Lisa, an office supervisor,
as an example. Lisa earns RM2000.00 monthly and with this income she is willing and able to buy, say 2 pairs of shoes
each month priced at RM100.00 per pair. Let's assume that Lisa is promoted to the post of office manager, and with this
promotion she now earns RM3000.00 per month. With the change in income, she is now willing and able to buy, say 3 pairs
of shoes each month at the same unchanged price of RM100.00 per pair. In this example, we see that there is a change
in demand for shoes. Increases in income do not necessarily cause increases in demand. There are instances when
increases in income cause decreases in demand for certain goods or services. Let's look at Lisa's case again.
When she was the office supervisor, she usually eats 3 pieces of sandwiches for lunch. There are other food at the cafetaria,
but she could not afford them. But since promoted as an office manager, Lisa reduced her consumption of sandwiches to
only one. The additional money she earns allow her to buy herself better lunch. In this example, she reduces her
demand for sandwiches. In the examples used in Lisa's case, shoes are considered as normal goods while sandwiches are
considered as inferior goods. Please don't regard inferior goods as poor or cheap goods. Inferior goods are goods
that are demanded less as income increases and more as income decreases, and they are not necessarily poor goods. Normal
goods are goods that are demanded more as income increases and less as income decreases.
Another factor that causes demand to change (resulting in the demand
curve shifting to the left or right of its original position) is changes in prices
of other related goods. Let's take two products, fountain pens and ink as examples. These two products
are called complementary goods where one
cannot function without the other. What will happen to the demand for ink when the price of pen is reduced? We
know that when the price of pen is reduced, more units of pens will be bought by consumers. This is consistent
with the law of demand: When price is low, quantity demanded is high. [More on this later]. Since pens
need ink, the demand for ink will increase, causing the demand curve of ink to shift to the right of its original position.
Note that the price reduction of pens do not cause the demand curve of pens to shift; it only results in the movement along
the demand curve, indicating an increase in quantity demanded. Other examples of complementary goods are cars and petrol,
men's shoes and socks, cameras and batteries.
Let's now take another two related goods: margarine and butter.
These two are called substitutes. In the case of substitutes, an increase
(or decrease) in price of one will change the demand of the other. If the price of butter increases, then the quantity
demanded for butter will decrease (law of demand: Less quantity will be bought at higher prices). Consumers will switch
from buying butter to buying more margarine. This will result in an increase in demand for margarine and its demand
curve will shift to the right of its original position. And if the price of butter decreases, more quantity will be
purchased resulting in a reduction in demand for margarine, causing the demand curve for margarine to shift to the left.
Other examples of substitutes are coffee and tea, chicken and salted fish, taxi service and bus service. What do you
think will happen to demand for bus services if taxi operators increase their fare?
Please note the the price of a particular good or service does not
change the demand for that good or service. In other words, a good or service own price does not effect a change in
demand (more on this later).
Another factor that influences demand is changes in population. Population in itself creates demand, but changes in population will result in
changes in demand, that is shifting the demand curve either to the left or right of its original position. Let's look
at an example. The total population of this campus is about 5000. And let's say that the campus's demand for soft
drinks priced at RM1.00 per bottle is 500 units per day. If the campus organizes a special event, say a football match
between Manchester United and Real Madrid tonight, thousands of soccer fans will fill our stadium and perhaps all other empty
spaces around campus! The population of the campus will suddenly increase from 5000 to 100000! Now, what do you
think will happen to the demand for soft drinks? Obviously, more than 500 units will be bought. The increase in
population will certainly shift the demand curve of soft drinks to the right, indicating an increase in demand. What
do you think will happen to the demand for soft drinks during the semester break when almost all students leave campus?
Another factor that can change demand is changes in tastes and preferences. People's tastes and preferences change over time and over certain conditions,
and as a result the demand for particular goods or services changes. Children toys are good examples. In
2001, my children (and perhaps all other children their age) were hooked on Gameboy, a hand-held computer game.
The demand for the game was quite high then. Today (July 7, 2003), Gameboy is not the preferred children's
toy. The new game in town is called beyblade, a top-like game played either individually or in teams.
What do you think will happen to the demand for Gameboys? There is still demand, but less is demanded today,
hence shifting the demand curve to the left of its original position. How long will the craze for beyblades
last? I'd say it'll probably last another month or so. Kids will change their tastes in the toys they enjoy
and as a result will shift the demand curve for beyblades to the left. Ladies' fashion, certain car accessories (like
sports wheel), and house decorations are some examples of goods with demands that change with taste and preferences.
Other special factors can change demand like political conditions,
climate, and festivities. What needs to be remembered is that changes in demand causes the demand curve to shift either
to the left of right of its original position.
and Changes to Quantity Demanded -- Quantity demanded is the actual number of units people will demand or buy
at various prices. Once a particular good or service has demand (that is, people are willing and able to buy), the next
thing to ask is: how much or how many will they buy? The number of units people will buy at various prices is the quantity
demanded. If at RM1.00 people are willing and able to buy 10 units, then we say the quantity demanded is 10. And
if at RM2.00 people are willing and able to buy 4 units, then the quantity demanded is 4. What is obvious from these
examples is the dependence of quantity demanded on price. You can see that as price of the good changes, the quantity
demanded of that same good changes too. It is important to note that
a good own price will cause changes in the quantity demanded for that good
but it will not cause a change in demand
of that same good. Another thing to note is in normal conditions [that is, ceteris paribus], the quantity demanded
for a particular good or service is high when the price is low, and low when the price is high. This is the law of demand.
The law of demand states that when prices are high, quantity demanded is low;
and when prices are low, quantity demanded is high, ceteris paribus. Because of this law, the demand curve is
downward sloping showing an inverse (or negative) relationship between price and quantity demanded.