Demand Terminology

If the price of widgets is originally $1.00 and people are buying 100, they may change to 90 for two reasons. One reason is that the price may rise to $2.00. The other reason is that one of the factors that is assumed to be constant may change, so that even though the price has not changed, quantity will. Economists distinguish these two cases. In the first case the demand relationship or schedule has not changed, but there has been movement within the relationship. Economists call a change of this sort a change in quantity demanded. The second sort of change is an alteration of the relationship. The original pairing of price and quantity is destroyed and replaced by a new pairing. Economists call this sort of change a change in demand.

It is important to realize that though the demand relationship looks concrete when it is illustrated with a table or graph, in everyday life demand curves are hidden. A demand curve refers to what people would do if various prices were charged, and very rarely are enough prices charged so a clear demand curve can be seen. This is not to say that the concept is of no importance to people who sell. They may not be interested in the demand curve as a relationship, but they do find it a boundary or constraint on their behavior. If there were an actual widget seller facing the demand curve in our demand table, he would find that he could not sell more than 90 widgets if he wanted to charge $2.00. He could of course sell fewer if he wanted to. He could sell only 70 at $2.00, but if he did this, he would earn far less than he could. If he wanted to sell more than 90, he would have to lower his price.

A Demand Curve
Price of
Number of Widgets
People Want to Buy

Thus, to an actual businessman the demand curve is important as a limitation on what he can do. A businessman may not know exactly where the demand curve is, and he may not think of it as fixed. Advertising—either informing or persuading people—can move the boundary. As we proceed further, we will see that there are still other ways to view the demand curve in addition to seeing it as a mathematical relationship and as a boundary that limits sellers.

Next we introduce supply.

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Copyright Robert Schenk