Demand

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Introduction

    The word "demand" refers to what you want. Of course, you can't always get what you want. However, you can probably lay out at least a general description of what you want and perhaps then be ready to make decisions about which goals to aim for first depending on what resources or constraints you face. Economists describe what you want as your demand.

    It is very helpful, though difficult at first, to practice sorting out what you demand from what you can accomplish or what constrains you. When you say to your roommate, "Let's go to McDonald's for a Big Mac," you have probably already decided that you both might want to go to McDonald's and also can afford McDonald's. However, from an economist's perspective, that decision involved two separate steps. First, you have a personal set of wants, rankings, indifferences--desires you'd have even if you didn't have a roommate to work things out with or a budget constraint given to you by your parents or job. Your personal desires might have included everything from a Big Mac to a steak to eating a gallon of ice cream. Economists call that general set of desires your demand for food. The separate part where you pick among those options depending on satisfying your budget or your deference to your pals or your aims to lose weight are your constraints. Your constraints are different from your demand. If you first figure out what you demand and then separately figure out the constraints, you will find the key to solving many of your own problems as well as to understanding much of economics in general.

    Economists also distinguish between your demand--sometimes called a demand function or demand curve--and the quantity you demand. Your demand is a description--a list or set of personal rankings--of what you'd do or buy in every possible circumstance you can imagine, feasible or not. If you get to McDonald's and find that the price of Big Macs has risen to $20/burger, you may decide you prefer to go to 5 Guys for a burger. In casual language, you'd likely say the Big Mac is not worth the price. Economists say that the quantity you demanded at a price of $20/burger was zero. But at $3/burger, the quantity you might have demanded was perhaps 2 Big Macs. A demand curve is an entire list of all the quantities you'd demand at each possible price you can imagine.

    Another term to distinguish is what economists call Aggregate Demand. Aggregate demand sounds like it should refer to the sum of everyone's demands. However, aggregate demand is a very different concept from an ordinary demand curve. You can sum up people's individual demands for particular clearly-defined products into demand curves. However, adding up all those demand curves for different goods across a whole economy's worth of products--apples, oranges, airplanes, defense, computers, parklands, house-cleaning services, government services, medical care, etc.--turns out to be trickier. Aggregate demand is considered to be part of macroeconomics.

Definitions and Basics

    Demand, from the Concise Encyclopedia of Economics
    One of the most important building blocks of economic analysis is the concept of demand. When economists refer to demand, they usually have in mind not just a single quantity demanded, but what is called a demand curve. A demand curve traces the quantity of a good or service that is demanded at successively different prices.

    The most famous law in economics, and the one that economists are most sure of, is the law of demand. On this law is built almost the whole edifice of economics. The law of demand states that when the price of a good rises, the amount demanded falls, and when the price falls, the amount demanded rises....
    Microeconomics, from the Concise Encyclopedia of Economics
    The strength of microeconomics comes from the simplicity of its underlying structure and its close touch with the real world. In a nutshell, microeconomics has to do with supply and demand, and with the way they interact in various markets....
    Subjective Value, a LearnLiberty video.
    Prof. Don Boudreaux demonstrates that value is not objective, but rather, is determined by the preferences of individuals.

In the News and Examples

    Cole on the Market for New Cars, podcast on EconTalk, June 9, 2008.
    Steve Cole, the Sales Manager at Ourisman Honda of Laurel in Laurel, Maryland talks with EconTalk host Russ Roberts about the strange world of new car pricing. They talk about dealer markup, the role of information and the internet in bringing prices down, why haggling persists, how sales people are compensated, and the gray areas of buyer and seller integrity....
    Marginalism, from the Concise Encyclopedia of Economics
    Adam Smith struggled with what came to be called the paradox of "value in use" versus "value in exchange." Water is necessary to existence and of enormous value in use; diamonds are frivolous and clearly not essential. But the price of diamonds--their value in exchange--is far higher than that of water. What perplexed Smith is now rationally explained in the first chapters of every college freshman's introductory economics text. Smith had failed to distinguish between "total" utility and "marginal" utility. The elaboration of this insight transformed economics in the late nineteenth century, and the fruits of the marginalist revolution continue to set the basic framework for contemporary microeconomics.

A Little History: Primary Sources and References

    Indifference curves, diminishing marginal utility, and the demand curve: Gradations of Consumers' Demand, Book III, Chapter III from Principles of Economics, by Alfred Marshall
    There is an endless variety of wants, but there is a limit to each separate want. This familiar and fundamental tendency of human nature may be stated in the law of satiable wants or of diminishing utility.... [See also the Footnote: Illustration of a Demand Curve]

Advanced Resources

    Elasticity and Its Expansion, by Morgan Rose.
    As this semester closed, I asked several colleagues who taught introductory economics courses to name the most difficult topics to teach to first-time economics students. There was some variation in their answers, but one concept was mentioned far more often than any other--elasticity. In this Teacher's Corner, we will define what elasticity means in economics, explain how one particular type of elasticity is calculated, and discuss why the concept is critical to economic agents trying to maximize their revenue. We will also see that although the precise definitions and terminology surrounding elasticity are just a little more than a century old, earlier economists had an understanding of both the idea behind elasticity and its relevance, especially with regard to taxation....

    Because all elasticities perform the same function, just with different variables, focusing on one type allows us to reduce clutter and confusion while exploring how elasticities work and why they are useful. In what follows below, we will emphasize the type of elasticity relevant to the first example given above, in which a manager wants to know how the quantity demanded of a product will change in response to a change in price. This type of elasticity, called the "price elasticity of demand," is probably the most intuitive and readily accessible type, and so serves as the best introduction into the subject....

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