Chapter 20.1 What is Demand?

An Introduction to Demand In the U.S., the forces of supply and demand work together to set prices. Demand is the desire, willingness and ability to buy a good or service. For demand to exist, a consumer must want a good or service be willing to buy it and have the resources to buy it. A demand schedule is a table that lists the various quantities of a product or service that someone is willing to buy over a range of possible prices.

continued A demand schedule can be shown as points on a graph. The graph lists prices on the vertical axis and quantities on the horizontal axis. Each point on the graph shows how many units of the product or service an individual will buy at a particular price. The demand curve is the line that connects these points. The demand curve slopes downward. This shows that people are normally willing to buy less of a product at a high price and more at a low price. According to the law of demand, quantity demanded and price move in opposite directions.

Individual v. Market Demand Market demand is the total demand of all consumers for a product or service. Market demand can also be shown as a demand schedule and demand curve. To illustrate, you would want to open a bike repair shop in an area with many bike riders and few repair shops. To measure demand in the area, you could check prices at other similar shops and poll consumers about their reactions to the prices.

continued We buy products for their utility – the pleasure, usefulness or satisfaction they give us. The utility of a good or service is different for different people. A particular product may have no utility for some people.

continued Say you eat a slice of pizza. Because you are hungry when you eat the first slice, this slice give you the most utility or satisfaction. As you grow less hungry, each additional slice you eat provides less marginal utility or less additional satisfaction. The principle of diminishing marginal utility says that our additional satisfaction tends to go down as we consume more and more units.

continued To make a buying decision, we consider whether the satisfaction we expect to gain is worth the money we must give up. If the extra benefits (marginal utility) are greater than the marginal cost (extra money given up), we make the purchase. If not, we keep the money instead. Because marginal utility diminishes, we would be willing to pay less for the second item than for the first. Likewise, we would be willing to pay even less for the third item. This helps to explain the downward sloping demand curve.