More about Demand

The most obvious cost a person bears in buying a product is the price of the product. Price reflects cost because people have a limited amount of funds that they can spend, and if they spend their money on one thing, they cannot spend it on another. When the price of a product goes up, the amount of other things that a person must give up in order to buy the product rises. As a result, we expect people to buy more hamburger if the price is $1.00 per pound than if it is $2.00 per pound.

The amount of income a person receives affects the cost of buying an item because it determines which options a person must give up when buying a product. If a person with a low income spends $5000 for a trip around the world, he will have to cut back on food, clothing, or shelter. The same trip will cause a person with a high income to cut back on a very different set of options.

Increases in people's incomes raise consumption of most products. These products are called normal goods. There are some products, however, that people use less of as their income increases; these products are called inferior goods. Public transportation is an example—as people's incomes rise, they stop riding the bus and drive their own cars. Blue jeans were once another example—people with higher incomes bought them less frequently than people with lower incomes. It was because they were a symbol of "working-class" clothes that they were adopted by the radical left in the 1960s, and from there they moved into high fashion.

Prices of related goods also influence how much of a product people buy. Goods that are substitutes satisfy the same set of goals or preferences. An example of a substitute for hamburger is pork. If pork prices are high, people are tempted to shift away from pork to hamburger, and if pork prices are low, people are tempted to shift from hamburger to pork. The opposite of a substitute is a complement, a good that helps complete another in some way. Catsup and hamburger buns are complements to hamburger, and if they are priced low enough, consumption of hamburger may rise. Sometimes complementary goods complete each other so well that they are sold together and we think of them as a single item. Left shoes and right shoes are an example.

There are other factors that influence the amount of a particular product that people are willing to buy, such as the number of consumers in the market and their expectations about future prices, incomes, and quality changes. To get a complete list for any product might be time consuming and difficult, but it is not necessary because we want to focus on the relationship between price and the quantity of a product that people are willing to buy during some interval of time. To do this, we will assume that all other factors are held constant.

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Copyright Robert Schenk