INDIVIDUAL DEMAND

Since consumer demand basically directs a private-enterprise system, it is important to define “demand” accurately at the outset. “Demand” is the schedule of amounts of any product that buyers will purchase at different prices during some stated time period. This definition takes some explaining, since it obviously isn’t quite what the word means in everyday conversation.

What is your demand for sirloin steak? A little thought will tell you that this is a meaningless question until you ask, “At what price and over how long a time?” You’ll surely buy more at 50 cents than at $1.00 a pound; and obviously you’ll buy more in a year than in a week. Recognizing this need to specify prices and a time period, we might construct a hypothetical “schedule” of amounts you would buy at different prices during some particular time interval, say a week, as in Table 20-2. The table shows how much steak you will buy during the week at each price shown, assuming that other things (especially your income and the prices of other commodities) remain unchanged.

When we speak of your “demand” for steak, we mean this entire schedule of amounts that you would buy at various prices, other things equal. It is meaningless to say that your demand is one or three pounds a week. By “demand” we mean instead your entire state of mind as to how many pounds you would buy at different prices, other things remaining unchanged. In principle, we might list every possible price from zero to infinity. Table 20-2 pictures your demand only over the price range shown.

This state of mind (your demand) can be shown graphically, as in Fig. 20-2. If we plot price on the vertical axis and pounds bought on the horizontal axis and connect the points, we can read off the resulting curve how many pounds you will buy during the week at any price shown, continuing the assumption of other things equal. Thus, at $1.20 you will buy no steak, at $1.00 you will buy one pound, and so on down the curve, just as the schedule above shows. If you haven’t bad much experience with graphs, it may be useful to practice plotting and reading off a number of such points.

FIG. 20-2 The demand curve shows how many pounds
of steak this individual will buy in a week at different
prices. He will buy more at lower than at higher prices.

Whether we use the schedule or plot the points graphically is a matter of convenience. They show the same thing. In making the graph, we merely join the plotted points. Since we knew only the points shown in the schedule, the readings from the curve between the points are only approximations. Only if the plotted points were very close together (say at one-cent intervals) would the curve properly be a continuous line, with the reading at every point meaningful and accurate. But most demand curves are shown as continuous lines because they are easier to work with that way and for our purposes are ordinarily good enough approximations between the points specifically plotted. And when we add together the demands of many people later, the bumps and corners in the curves are eliminated, so we tend to have smooth, continuous curves.

But watch out for one tricky point, whether you use schedules or graphs! Going back to your demand for steak, suppose the price is $1.00 and you are buying one pound per week. Now the local grocer lowers the price to 80 cents and you step up your weekly purchases to two pounds. This is not a change in demand. Your demand (your state of mind toward steak) has not changed. You have merely moved to a different point on your demand schedule, or curve, as a result of the lower price, as the original demand schedule or curve says you would do. This increased purchase at a lower price is merely a reflection of the downward slope of your demand curve.

Why Demand Curves Slope Downward

It seems obvious that you will buy more of anything at a low price than at a high one. Thus, on the kind of graph we have drawn, the demand curve will slope down, from northwest to southeast. Why? First, at a lower price for anything you can afford to buy more of it out of any given income. Second, at a lower price you are likely to want to buy more of it because it becomes relativelv more attractive compared with other things you might spend your money on, given unchanged prices of other things. You will want to substitute sirloin for hamburger as their prices converge. And at low enough prices you may find new uses for sirloin—for example, feeding sirloin instead of dog biscuits to your dog. Thus, for both reasons, the quantity bought typically increases as the price falls.

Looked at another way, the downwardsloping demand curve says that you will be willing to pay a high price for a little steak each week, but the more steak you have the less you’re willing to pay per additional pound to increase your weekly consumption still further. Many economists have associated this tendency with the decreasing satisfaction, or “utility,” you get from each additional pound of steak you add to your weekly diet. We call it the law of diminishing marginal utility. The additional, or marginal, utility (or satisfaction) you obtain per unit falls as you get more units within the stated time period. Marginal utility is the want-satisfaction obtained from having one  additional unit of some commodity per unit of time. Try applying the law to yourself—for oranges, movies, houses.

Changes in Demand

Remember that your “demand” for steak is your entire set of intentions about buying steak. These depend on how much income you have, how you evaluate steak compared with other things, and on the relative prices of the alternatives you are considering. Now suppose that you get tired of steak and develop a taste for seafood. You will now buy less steak than before at each of the prices shown. This change in attitude is a change in demand. Your demand for steak has decreased.

A change in demand is illustrated easily by using demand curves. Begin with the curve in Fig. 20-2. Your lower demand for steak would be reflected in a new demand curve, to the left of, or below, the old curve. You will now buy only one pound of steak per week at 60 cents, and none at any higher price; only two pounds at 50 cents; and so on. This new, lower demand curve is shown in Fig. 20-3 as curve BB; the original demand curve is AA. If something increases your demand for steak, say a fatter paycheck to finance such delicacies, the new, higher demand might be indicated by CC. A change in demand is shown by a move to another demand curve.

Why would your demand for beefsteak, or Buicks, or neckties change? There are three major reasons. First, your tastes may change. You simply decide you don’t like beefsteak, or that now you prefer Buicks to other cars. Second, your income may change. As a beginning office clerk, you may have to be satisfied with a secondhand Ford. With a doubled paycheck you may be in the Pontiac class. Third, changes in the availability and prices of other commodities may change your demand. If pork prices soar, your demand for steak may rise because you’ll buy more steak than before now that pork costs more. Note that such changes in demand reflect changes in “other things” (your income and prices of other goods) which were previously being held unchanged.

It is important to distinguish between movements along the same demand curve and shifts in the curve itself. Many economic fallacies are perpetrated through slippery use of the concept of “demand.” Try checking your own grasp with these questions: (1) Production of sheep rises, prices fall, and consumers buy more mutton. Is there an increase in the demand for mutton? (Hint: does the demand curve itself shift, or do customers merely buy more mutton on the same demand curve at lower prices?) (2) Chrysler comes out with a new, more powerful engine and Buick sales decline. Is there a drop in the demand for Buicks? (3) Philco raises the price of its TV sets and sales drop off. Is there a drop in demand? (4) Congress puts a new tax on movie admissions and movie attendance drops. Is there a drop in demand?