Demand

    A key point to remember about all four of these terms is that they refer not to what firms and consumers actually do, but to what they want to do.

    For example, the QUANTITY DEMANDED at any given price is how much consumers want to buy at that given price.  E.g., in the widget market, the quantity demanded at a price of $10/widget might be 750 widgets.

    Error:  Confusing the quantity demanded with the quantity bought.
    If the quantity demanded at $5/widget is 850 widgets, how many widgets are bought at that price?
    I don't know!  If sellers only want to sell 400 widgets at $5/widget, then the quantity bought will be 400, not 750.  All we can say is that the quantity bought won't be more than 750.

    There is a different quantity demanded for each price.  For example:
 

The demand for widgets

price	quantity demanded
$5	1000 widgets
$6	950 widgets
$7	900 widgets
$8	850 widgets
$9	800 widgets
$10	750 widgets

    This table, giving the quantity demanded at different prices, shows the DEMAND for widgets.

    Error:  Confusing demand with quantity demanded.
    The quantity demanded is how much consumers want to buy at a PARTICULAR price.  The demand is a schedule showing how much consumers want to buy at ANY given price; i.e., the demand is a schedule showing the quantity demanded at any given price.  The table above, in its entirety, shows demand; each row of the table shows the quantity demanded at a particular price.

    Error:  Confusing a change in quantity demanded with a change in demand.
    Say the price starts at $7, where quantity demanded is 900.  Then the price falls to $5.  We say that the quantity demanded has increased to 1000.  We do not say that demand has increased, because it hasn't; the table representing demand is still the same, we've simply moved to a different row, i.e., a different quantity demanded.
    On the other hand, suppose that the surgeon general reports that widgets are carinogenic.  Suddenly, fewer people want to buy widgets for ANY given price:
 
 

The demand for widgets, before and after the surgeon general's announcment
 

price	old quantity demanded	new quantity demanded
$5	1000 widgets	900 widgets
$6	950 widgets	850 widgets
$7	900 widgets	800 widgets
$8	850 widgets	750 widgets
$9	800 widgets	700 widgets
$10	750 widgets	650 widgets

    Before, whenever the price was $8, consumers wanted to buy 850 widgets; now, at $8 the quantity demanded is only 750 widgets.  Similarly for all the other prices.  We call this situation a decrease in demand:  Demand decreases if the quantity demanded at each price decreases.  So a change in quantity demanded occurs when we move to a different row of the table; a change in demand occurs when we move to a different table.

    So far all I've been doing is making and explaining a couple of definitions.  I haven't said anything about how economies actually work.  But now we're ready to state a fundamental principle of economics:
    The Law of Downward Sloping Demand:  If the price falls, with all other factors held constant, then the quantity demanded rises.
    I.e., the lower the price, the more people want to buy.
    There are some fancy theoretical "proofs" of this law, and some fancy attempts to verify it in actual markets, but I'm not going to try to convince you that it's true.  We're just going to assume it, and I trust that you will find it convincing.  Surprisingly, this one law, or assumption, has some powerful implications.
 
       For another, more detailed treatment of demand, see Chapter 3 of David Friedman's Price Theory.

Proceed to Supply.
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This page maintained by Steven Blatt. Suggestions, comments, questions, and corrections are welcome.