In this chapter you'll learn about demand. In the next chapter you'll learn about supply. You'll also learn how to put demand and supply together to make a picture of a market. Later chapters will expand on demand, supply, and markets and apply them to a variety of real world situations.
Demand and supply are based on common sense. They reflect such self-evident truths such as these: A sale generates more business, and raising the wage makes the job more attractive. Demand and supply are the main tools of analysis for the whole course so it is important that you understand them inside and out. This understanding won't come all at once. Try keeping a list of the things that puzzle you. Many of them will be cleared up as you read on.
People buy more of a product when its price is low and less of it when its price is high. That is the behavior the Law of Demand describes. The LAW OF DEMAND states that the lower the price, the larger the quantity people buy and the higher the price, the smaller the quantity people buy, holding other things constant. The "other things held constant" are such things as income and the prices of other goods. We'll discuss their effects in a later chapter.
The law of demand is a natural law. It was not passed by any legislature, nor can it be repealed by any legislature. It describes how way people behave. Underlying the Law of Demand is the fact that people can cut back on the consumption of the product, if they have to. In most cases, they can do without it all together. This is made easier by the fact that there are substitutes for virtually everything. Two goods are SUBSTITUTES for one another if one can be used instead of the other. Margarine is a substitute for butter, and butter is a substitute for margarine. Close substitutes are fresh squeezed orange juice, orange juice from concentrate, and frozen orange juice.
In response to a small price increase in juice from concentrate, many people substitute one of the other products for juice from concentrate. In response to a small price reduction many people substitute this product for the other ones.
Heroin is a good (?) for which there are no close substitutes. In response to a large increase in the price of heroin some users abandon the product and others cut back, but the reduction is very modest. On the other hand, in response to a large price reduction very few people take up the habit or increase their dosages significantly.
In both cases Law of Demand applies: Larger quantities are demanded at lower prices. Typically, substitutability is much more common than most people realize. Look at food, for example.
Food is a necessity of life, but people don't buy "food." They buy Kellogg's Corn Flakes, Prairie Farm milk, Sunkist oranges, and innumerable other specific products for which there are many substitutes. We could go further and say that people don't just buy Kellogg's Corn Flakes. They buy them at the Thompson's Supermarket on University Street. For that there are even more substitutes, like the Kellogg's Corn Flakes sold at the Kroger's Supermarket on Lake Street, or the IGA Supermarket on Lake, or the Eagle Supermarket on Glen.
Water is a necessity of life but, instead of water, the French drink wine, the Germans drink beer, and the younger generation of Americans drink Coke and Pepsi. The fact is that drinking accounts for a tiny fraction of the water consumed. Most of the water consumed by households is used by toilets, showers, leaky faucets, and green lawns. There are plenty of ways to dramatically reduce water consumption, and a higher price would give people just the incentive they need to find them.
The Law of Demand is a law. There are no exceptions. The Law states that the higher the price of a particular good, the smaller the amount purchased, and the lower the price of the good, the larger the amount purchased. It applies to Kellogg's corn flakes, water, and even surgery. Yes, even surgery. Did you know that much surgery is elective? ("Elective" means "chosen" or "not required.") Nose jobs are a good example.
The Law even applies to surgery that is not elective. Many people delay needed surgery indefinitely because of the price. Some recover without surgery, many are none the worse for the delay, others worsen, and some die. The point is that the price is an important factor. You are wrong if you think that "Price is no object."
The law of demand applies to all scarce goods. That is, it applies to all goods that have a price. It applies to each of us as individuals and all of us in any number of groupings. It applies to the customers of a particular store, to members of an ethnic group, or to residents of a city, state, or country. It also applies to purchases per day, per month or per year. In fact it applies to purchases by any specified group over any specified time period.
The behavior the Law of Demand describes is depicted graphically by the demand curve.