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When people think about what it means to "demand" something, they usually envision some sort of "but I want it" sort of scenario. Economists, on the other hand, have a very precise definition of demand. For them demand is the relationship between the quantity of a good or service consumers will purchase and the price charged for that good. More precisely and formally the Economics Glossary defines demand as "the want or desire to possess a good or service with the necessary goods, services, or financial instruments necessary to make a legal transaction for those goods or services." Put another way, an individual must is willing, able, and ready to purchase an item if they are to be counted as demanding an item.
What Demand Is Not
Demand is not simply a quantity consumers wish to purchase such as '5 oranges' or '17 shares of Microsoft', because demand represents the entire relationship between quantity desired of a good and all possible prices charged for that good. The specific quantity desired for a good at a given price is known as the quantity demanded. Typically a time period is also given when describing quantity demanded, since obviously the quantity demanded of an item would differ based on whether we were talking about per day, per week, and so on.
Examples of Quantity Demanded
When the price of an orange is 65 cents the quantity demanded is 300 oranges a week.
If the local Starbucks lowers their price of a tall coffee from $1.75 to $1.65, the quantity demanded will rise from 45 coffees an hour to 48 coffees an hour.
A demand schedule is a table which lists the possible prices for a good and service and the associated quantity demanded. The demand schedule for oranges could look (in part) as follows:
- 75 cents - 270 oranges a week
- 70 cents - 300 oranges a week
- 65 cents - 320 oranges a week
- 60 cents - 400 oranges a week
A demand curve is simply a demand schedule presented in graphical form. The standard presentation of a demand curve has price given on the Y-axis and quantity demanded on the X-axis. You can see a basic example of a demand curve in the picture presented with this article.
The Law of Demand
The law of demand states that, ceteribus paribus (Latin for 'assuming all else is held constant'), the quantity demanded for a good rises as the price falls. In other words, the quantity demanded and price are inversely related. Demand curves are drawn as 'downward sloping' due to this inverse relationship between price and quantity demanded.
Price Elasticity of Demand
The price elasticity of demand represents how sensitive quantity demanded is to changes in price.