Introduction to Demand

A market exists when buyers and sellers interact to exchange products. You might think that the easiest market to explore would be the interaction between one buyer and one seller. For example, suppose Crusoe has coconuts and would really like some fish, and Friday has fish and would really like some coconuts. There is the possibility for a mutually beneficial trade here, but we cannot predict what the price or quantity will be even if we know their preferences because the outcome depends on their relative bargaining skills. Hence, economic theory has little to tell us about this most simple of markets.

It is easier to analyze a market in which there are many buyers and sellers, each small relative to the overall market. It helps also if both buyers and sellers are well informed, and buyers and sellers form distinct and separate groups. To explain a market with these qualities, economists use supply and demand analysis. You should be aware that supply and demand analysis does not work in all markets, but only in those with the above characteristics.

If buyers are a group distinct from the sellers, we can analyze how they act separately from how sellers act. Only after we have looked at these two groups separately will we combine them and see how they interact. We will begin by looking at the buyers.

What determines the amount of a product that people are willing and ready to buy during some period of time? For example, what determines the amount of hamburger purchased in Chicago during a week? Economists answer such questions by examining the costs and benefits of buying the product. When any of the costs or benefits changes, the amount of the product that people will buy should also change. in other words, people respond to incentives.

The benefits a person gets from a product depend on his goals. These goals are referred to in many ways in discussions of demand. The words "tastes," "wants," "needs," "preferences," and "usefulness" all refer to goals. When people's goals change, the amount of benefit they get from the good changes, and this will cause them to change the amount of the good they want to buy.

Goals (or preferences or tastes) depend on many factors, such as the age of people and the amount of education they have. Social custom is an important determinant of preferences and can account for many differences in demand among groups. One can explain the large differences in squid sales in Japan and the United States, or the large differences in consumption of horse meat in Europe and the United States, almost entirely in terms of differences in preferences caused by differences in social custom.

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