Every now and then I come across a blog, a blogger, a friend, or a professor that somehow has managed to make it through life without so much as a basic grasp of economics. In my previous posts I have generally jumped straight into economic issues with the assumption that most people have at least a basic understanding of micro and macro-economic concepts. I have decided that I should not make such an assumption after my IPE Professor slaughtered a basic supply and demand explanation this semester. If you have taken an economics course and understand the concepts go forth and explain, if you have not you may be interested.
The basic supply and demand graphs are pretty easy to explain, so we’ll start with demand.
Every person has their own personal demand for a good x, let’s say rum. When a bottle of rum costs $50 Betty doesn’t demand any of it, she can get by without alcohol. When run costs $40 a bottle she demands 1 bottle, when it costs $30 she demands 2 bottles, when it costs $20 she demands 3, and so on. But Ben may really love rum and when it costs $50 per bottle he will buy 3, when it costs $40 he’ll buy 6, when it costs $30 he’ll buy 9, and when it costs $20 he’ll buy 12 bottles of rum. Bill may hate rum so he doesn’t demand any rum ever, and Bob may always buy one bottle of rum regardless of the price.
Your individual demand curve can be graphed with price on the vertical axis and quantity on the horizontal axis. This will give you your demand curve.
Economists are generally not too concerned with a single person’s demand curve, but if you add up everyone’s demand for rum at every price you will get a market demand curve. In this case you add the quantity that Betty, Ben, Bill, and Bob demand at each price. As price rises the amount of rum demanded decreases giving the market demand curve a downward slope.
Now a demand curve assumes that everything else that affects demand for rum is stable. Other factors will cause a shift in the demand curve; these factors are the number of consumers, price of substitutes, the price of compliments, consumer tastes, and consumer expectations.
Number of Consumers -
Adding new consumers will move the demand curve over to the right so that at every price more rum is demanded, and subtracting consumers will move the demand curve to the left so that at every price less rum is demanded.
Consumer Tastes –
If it suddenly becomes chic to drink rum then people will buy more rum at the same price (think about childhood fads like beany babies). But if people suddenly get the idea that only alcoholics drink rum then less rum will demanded at each price; Betty, Ben, Bob, and Bill will not want to be viewed as alcoholics so they will drink less rum.
Consumer Expectations –
If people expect something to happen that will change their expectations for the future they may change the quantity of rum that they demand today. If you heard that there would soon be a prohibition on the sale of rum in your country you would stock up, buying more rum at the same price. If you expected the price of rum to drop in a few weeks then maybe you would put off buying it until the price fell.
Price of Compliments –
A compliment to a good is something that goes well with it, such as hamburgers and hamburger buns or pizza and beer. Here we’ll say that coke is a compliment to rum, how else can you make a rum and coke? So if the price of coke drops then it becomes relatively less expensive to have a rum and coke, so you will be willing to buy more rum at the same price (think of those coupons in the grocery store that give you 50c of x if you buy y). Likewise, if the price of coke increases that you will demand less rum at the same price.
Price of Substitutes –
A substitute for a good is something that is relatively close to one good that consumption can switch to. The most obvious example of this is Coke and Pepsi, they are practically the same thing, but hamburgers and hotdogs will also work. Whiskey could be a substitute for rum. If the price of whiskey decreases then it is reasonable to say that people will substitute their rum consumption with whiskey consumption, so less rum will be demanded at the same price. If the price of whiskey increases then all of the people who prefer whiskey to rum may switch over and consume rum, thus increasing the quantity of rum demanded at every price.
Now, when you hear some one talking about an “increase in demand” they are generally talking about a shift in the demand curve, a greater quantity of a good demanded at every price.
