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Demand for Goods and Services Economists use the term demand to refer to the amount of some good or service consumers are willing and able to purchase at each price. Demand is based on needs and wants—a consumer may be able to differentiate between a need and a want, but from an economist's perspective, they are the same thing. Demand is also based on
ability to pay. If you can't pay for it, you have no effective demand. An example from the market for gasoline can be shown in the form of a table or a graph. A table that shows the quantity demanded at each price, such as Table 1, is called a demand schedule. Price in this case is measured in dollars per gallon of gasoline. The quantity demanded is measured in millions of gallons over some time period (for example, per day or per year) and over some geographic area (like a state or a country).
A demand curve shows the relationship between price and quantity demanded on a graph like Figure 2, below, with price per gallon on the vertical axis and quantity on the horizontal axis. Note that this is an exception to the normal rule in mathematics that the independent variable (x) goes on the horizontal axis and the dependent variable (y) goes on the vertical. Economics is different from math! Note also that each point on the demand curve comes from one row in Table 1. For example, the upper most point on the demand curve corresponds to the last row in Table 1, while the lower most point corresponds to the first row. The demand schedule (Table 1) shows that as price rises, quantity demanded decreases, and vice versa. These points can then be graphed, and the line connecting them is the demand curve (shown by line D in the graph, above). The downward slope of the demand curve again illustrates the law of demand—the inverse relationship between prices and quantity demanded. Watch ItThe demand curve shows how much of a good people are willing to buy at different prices. Watch this video to see an example of the demand for oil. When oil prices are high, fewer people are willing to pay the hefty price tag but some consumers, like airliners, depend so heavily on using oil for fuel, they are willing to pay a lot. Other low-value consumers will be less likely to pay for expensive oil, as they could find substitutes or alternatives. Demand curves will look somewhat different for each product. They may appear relatively steep or flat, or they may be straight or curved. Nearly all demand curves share the fundamental similarity that they slope down from left to right. In this way, demand curves embody the law of demand: As the price increases, the quantity demanded decreases, and conversely, as the price decreases, the quantity demanded increases. Demand vs. Quantity Demanded In economic terminology, demand is not the same as quantity demanded. When economists talk about demand, they mean the relationship between a range of prices and the quantities demanded at those prices, as illustrated by a demand curve or a demand schedule. When economists talk about quantity demanded, they
mean only a certain point on the demand curve, or one quantity on the demand schedule. In short, demand refers to the curve and quantity demanded refers to the (specific) point on the curve. What Factors Affect Demand? We defined demand as the amount of some product that a consumer is willing and able to purchase at each price. This suggests at least two factors, in addition to price, that affect demand. "Willingness to purchase" suggests a
desire to buy, and it depends on what economists call tastes and preferences. If you neither need nor want something, you won't be willing to buy it. "Ability to purchase" suggests that income is important. Professors are usually able to afford better housing and transportation than students, because they have more income. The prices of related goods can also affect demand. If you need a new car, for example, the price of a Honda may affect your demand for a Ford. Finally, the size or
composition of the population can affect demand. The more children a family has, the greater their demand for clothing. The more driving-age children a family has, the greater their demand for car insurance and the less for diapers and baby formula. The Ceteris Paribus AssumptionA demand curve or a supply curve (which we'll cover later in this module) is a relationship between two, and only two, variables: price on the vertical axis and quantity on the horizontal axis. The assumption behind a demand curve or a supply curve is that no relevant economic factors, other than the product's price, are changing. Economists call this assumption ceteris paribus, a Latin phrase meaning "other things being equal." Any given demand or supply curve is based on the ceteris paribus assumption that all else is held equal. Therefore, a demand curve or a supply curve is a relationship between two, and only two, variables when all other variables are held equal. If all else is not held equal, then the laws of supply and demand will not necessarily hold. WHEN DOES CETERIS PARIBUS APPLY?Ceteris paribusis applied when we look at how changes in price affect demand or supply, but ceteris paribus can also be applied more generally. In the real world, demand and supply depend on more factors than just price. For example, a consumer's demand depends on income, and a producer's supply depends on the cost of producing the product. How can we analyze the effect on demand or supply if multiple factors are changing at the same
time—say price rises and income falls? The answer is that we examine the changes one at a time, and assume that the other factors are held constant. Watch ItWatch this video to review the theory of demand. Remember that, according to the law of demand and all other things being equal (ceteris paribus):
Glossary ceteris paribus: Licenses and AttributionsCC licensed content, Shared previously
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What refers to the willingness and ability of buyers to purchase goods and services?Demand refers to the consumer's desire and willingness to buy a product or service at a given period or over time. Consumers must also have the ability to pay for something they want or need as determined by their disposable income budget. Therefore, demand is a force that affects economic growth and market expansion.
What is the ability to buy goods and services?Two forces work together in markets to establish prices for all the goods and services we buy. They are demand—the desire, willingness, and ability to buy a good or service, and supply—the quantities of a good or service that producers are willing to sell at all possible market prices.
What is the willingness and ability of buyers to purchase different quantities of a good at different prices?Demand refers to the willingness of buyers to purchase different quantities of a good at different prices during a specific period.
What is referred to as the willingness to buy?Willingness to pay (WTP—how much one is willing to pay for something) and willingness to buy (WTB—whether one is willing to buy something at a given price) are two common methods to elicit valuations and normatively should yield the same valuation order between two options.
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