What Is Quantity Demanded?
Quantity demanded is a term used in economics to describe the total amount of a good or service that consumers demand over a given interval of time. It depends on the price of a good or service in a marketplace, regardless of whether that market is in equilibrium.
The relationship between the quantity demanded and the price is known as the demand curve, or simply the demand. The degree to which the quantity demanded changes with respect to price is called the elasticity of demand.
Key Takeaways
- In economics, quantity demanded refers to the total amount of a good or service that consumers demand over a given period of time.
- Quantity demanded depends on the price of a good or service in a marketplace.
- The price of a product and the quantity demand for that product have an inverse relationship, according to the law of demand.
Quantity Demanded
Understanding Quantity Demanded
Inverse Relationship of Price and Demand
The price of a good or service in a marketplace determines the quantity that consumers demand. Assuming that non-price factors are removed from the equation, a higher price results in a lower quantity demanded and a lower price results in higher quantity demanded. Thus, the price of a product and the quantity demanded for that product have an inverse relationship, as stated in the law of demand.
An inverse relationship means that higher prices result in lower quantity demand and lower prices result in higher quantity demand.
Change in Quantity Demanded
A change in quantity demanded refers to a change in the specific quantity of a product that buyers are willing and able to buy. This change in quantity demanded is caused by a change in the price.
Increase in Quantity Demanded
An increase in quantity demanded is caused by a decrease in the price of the product (and vice versa). A demand curve illustrates the quantity demanded and any price offered on the market. A change in quantity demanded is represented as a movement along a demand curve. The proportion that quantity demanded changes relative to a change in price is known as the elasticity of demand and is related to the slope of the demand curve.
An Example of Quantity Demanded
Say, for example, at the price of $5 per hot dog, consumers buy two hot dogs per day; the quantity demanded is two. If vendors decide to increase the price of a hot dog to $6, then consumers only purchase one hot dog per day. On a graph, the quantity demanded moves leftward from two to one when the price rises from $5 to $6. If, however, the price of a hot dog decreases to $4, then customers want to consume three hot dogs: the quantity demanded moves rightward from two to three when the price falls from $5 to $4.
By graphing these combinations of price and quantity demanded, we can construct a demand curve connecting the three points.
Using a standard demand curve, each combination of price and quantity demanded is depicted as a point on the downward sloping line, with the price of hot dogs on the y-axis and the quantity of hot dogs on the x-axis. This means that as price decreases, the quantity demanded increases. Any change or movement to quantity demanded is involved as a movement of the point along the demand curve and not a shift in the demand curve itself. As long as consumers' preferences and other factors don't change, the demand curve effectively remains static.
Price changes change the quantity demanded; changes in consumer preferences change the demand curve. If, for example, environmentally conscious consumers switch from gas cars to electric cars, the demand curve for traditional cars would inherently shift.
Price Elasticity of Demand
The proportion to which the quantity demanded changes with respect to price is called elasticity of demand. A good or service that is highly elastic means the quantity demanded varies widely at different price points.
Conversely, a good or service that is inelastic is one with a quantity demanded that remains relatively static at varying price points. An example of an inelastic good is insulin. Regardless of price point, those who need insulin demand it at the same amount.
A shift in the demand curve occurs when a determinant of demand other than price changes. It occurs when demand for goods and services changes even though the price didn't.
To understand this, you must first understand what the demand curve does. It plots the demand schedule. That is a chart that details exactly how many units will be bought at each price. It's guided by the law of demand which says people will buy fewer units as the price increases. That's as long as nothing else changes, an economic principle known as ceteris paribus. That means all determinants of demand other than price must stay the same.
Factors That Cause a Demand Curve to Shift
According to the law of demand, the quantity demanded of a good increases or decreases based on a decrease or increase in its price. A shift in the demand curve is the unusual circumstance when the price remains the same but at least one of the other five determinants of demand change. Those determinants are:
- Income of the buyers
- Consumer trends and tastes
- Expectations of future price, supply, and needs
- The price of related goods. These can be substitutes, such as beef versus chicken. They can also be complementary, such as beef and Worcestershire sauce.
- The number of potential buyers (applies to aggregate demand only)
A shift in the demand curve for an item has both short-term and long-term impact on its price and quantity demanded. For example, when incomes rise, people can buy more of everything they want. In the short-term, the price will remain the same, and the quantity sold will increase.
The same effect occurs if consumer trends or tastes change. If people switch to electric vehicles, they will buy less gas even if the price of gas remains the same.
Note
A shift in demand curve is different from movement along the demand curve. The latter depicts changes to quantity demanded based on change in price.
Demand Curve Shifts Left
The demand curve shifts to the left if the determinant causes demand to drop. That means less of the good or service is demanded. That happens during a recession when buyers' incomes drop. They will buy less of everything, even though the price is the same.
For example, consider the following demand and supply chart for a product. If originally at price P, quantity Q was demanded, once the demand curve shifts to the left at the same price P, lower quantity Q1 will be demanded.
The Balance
Over the long run, demand and supply forces adjust to arrive at a new equilibrium. If there are no changes to the supply of that item, ultimately left shift in the demand curve will force a decrease in prices and the demand and supply will intersect at an equilibrium E1. The new equilibrium would have a lower price P1, although the quality demanded (Q2) would be higher than the temporary increase at Q1 but lower than the original at Q.
The Balance
Demand Curve Shifts Right
The curve shifts to the right if the determinant causes demand to increase. This means more of the good or service are demanded even though there's no change in price. When the economy is booming, buyers' incomes will rise. They'll buy more of everything, even though the price hasn't changed.
For example, consider the following demand and supply chart for a product. If originally at price P, quantity Q was demanded, once the demand curve shifts to the right at the same price P, more quantity (Q1) will be demanded.
The Balance
If there are no changes to the supply of that item, ultimately a right shift in the demand curve will force an increase in prices and the demand and supply will intersect at an equilibrium E1. The new equilibrium would have a higher price P1, although the quality demanded (Q2) would be lower than the temporary increase at Q1 but higher than the original at Q.
The Balance
How Demand Determinants Shift the Curve
Here are examples of how the five determinants of demand other than price can shift the demand curve.
- Income of the buyers: If you get a raise, you're more likely to buy more of both steak and chicken, even if their prices don't change. That shifts the demand curves for both to the right.
- Consumer trends: During the mad cow disease scare, consumers preferred chicken over beef. Even though the price of beef hadn't changed, the quantity demanded was lower. That shifted the demand curve to the left.
- Expectations of future price: When people expect prices to rise in the future, they will stock up now, even though the price hasn't even changed. That shifts the demand curve to the right. For this reason, the Federal Reserve sets up an expectation of mild inflation. Its target inflation rate is 2%.
- The price of related goods: If the price of beef rises, you'll buy more chicken even though its price didn't change. The increase in the price of a substitute, beef, shifts the demand curve to the right for chicken. The opposite occurs with the demand for Worcestershire sauce, a complementary product. Its demand curve will shift to the left. You are less likely to buy it, even though the price didn't change, since you have less beef to put it on.
- The number of potential buyers: This factor affects aggregate demand only. When there's a flood of new consumers in a market, they will naturally buy more product at the same price. That shifts the demand curve to the right. An example of that can be that work-from-home restrictions due to the Covid-19 pandemic made it easier for many Americans to relocate. As a result, a lot of people moved from cities to suburban areas or locations where homeownership seemed more affordable. That combined with with near-zero interest rates led to a huge demand for suburban housing.
Key Takeaways
- When there is movement only along the demand curve, this means price is the only factor that is changing
- When the entire demand curve shifts, it signals that other determinants of demand, excluding price, have changed
- Aside from price, other determinants of demand that affect the demand schedule or chart are: income, consumer tastes, expectations, price of related goods, and number of buyers.
- Shift of the demand curve to the right indicates an increase in demand at the same price because a factor, such as consumer trend or taste, has risen for it
- A shift to the left displays a decrease in demand at the same price because another factor, such as number of buyers, has slumped
Frequently Asked Questions (FAQs)
What is the difference between a movement and a shift in the demand curve?
Demand curve movement refers to changes in price that affect the quantity demanded. A demand curve shift refers to fundamental changes in the balance of supply and demand that alter the quantity demanded at the same price. For example, you may be willing to buy 10 apples at $1. If the grocery store drops the price to $0.75, then that demand curve movement means you might buy 15 apples instead of 10. If you get a raise at work, that demand curve shift may mean you're willing to buy 15 apples at $1 and 20 apples at $0.75.
Why is the demand curve downward sloping?
The demand curve slopes downward because more consumers would be willing or able to afford goods or services the closer their prices get to $0. This is the basic law of demand. As the price drops, it becomes easier to entice consumers to try a good or service. That's why coupons and free trial promotions work so well at attracting new customers.