Is the amount of a good or service consumers are willing and able to buy a various possible prices during a specified time period is?

What Is Quantity Demanded?

Quantity demanded is a term used in economics to describe the total amount of a good or service that consumers demand over a given interval of time. It depends on the price of a good or service in a marketplace, regardless of whether that market is in equilibrium.

The relationship between the quantity demanded and the price is known as the demand curve, or simply the demand. The degree to which the quantity demanded changes with respect to price is called the elasticity of demand.

Key Takeaways

• In economics, quantity demanded refers to the total amount of a good or service that consumers demand over a given period of time.
• Quantity demanded depends on the price of a good or service in a marketplace.
• The price of a product and the quantity demand for that product have an inverse relationship, according to the law of demand.

Quantity Demanded

Understanding Quantity Demanded

Inverse Relationship of Price and Demand

The price of a good or service in a marketplace determines the quantity that consumers demand. Assuming that non-price factors are removed from the equation, a higher price results in a lower quantity demanded and a lower price results in higher quantity demanded. Thus, the price of a product and the quantity demanded for that product have an inverse relationship, as stated in the law of demand.

An inverse relationship means that higher prices result in lower quantity demand and lower prices result in higher quantity demand.

Change in Quantity Demanded

A change in quantity demanded refers to a change in the specific quantity of a product that buyers are willing and able to buy. This change in quantity demanded is caused by a change in the price.

Increase in Quantity Demanded

An increase in quantity demanded is caused by a decrease in the price of the product (and vice versa). A demand curve illustrates the quantity demanded and any price offered on the market. A change in quantity demanded is represented as a movement along a demand curve. The proportion that quantity demanded changes relative to a change in price is known as the elasticity of demand and is related to the slope of the demand curve.

An Example of Quantity Demanded

Say, for example, at the price of $5 per hot dog, consumers buy two hot dogs per day; the quantity demanded is two. If vendors decide to increase the price of a hot dog to $6, then consumers only purchase one hot dog per day. On a graph, the quantity demanded moves leftward from two to one when the price rises from $5 to $6. If, however, the price of a hot dog decreases to $4, then customers want to consume three hot dogs: the quantity demanded moves rightward from two to three when the price falls from $5 to $4. 

By graphing these combinations of price and quantity demanded, we can construct a demand curve connecting the three points.

Using a standard demand curve, each combination of price and quantity demanded is depicted as a point on the downward sloping line, with the price of hot dogs on the y-axis and the quantity of hot dogs on the x-axis. This means that as price decreases, the quantity demanded increases. Any change or movement to quantity demanded is involved as a movement of the point along the demand curve and not a shift in the demand curve itself. As long as consumers' preferences and other factors don't change, the demand curve effectively remains static.

Price changes change the quantity demanded; changes in consumer preferences change the demand curve. If, for example, environmentally conscious consumers switch from gas cars to electric cars, the demand curve for traditional cars would inherently shift.

Price Elasticity of Demand

The proportion to which the quantity demanded changes with respect to price is called elasticity of demand. A good or service that is highly elastic means the quantity demanded varies widely at different price points.

Conversely, a good or service that is inelastic is one with a quantity demanded that remains relatively static at varying price points. An example of an inelastic good is insulin. Regardless of price point, those who need insulin demand it at the same amount.

What Is Demand Theory?

Demand theory is an economic principle relating to the relationship between consumer demand for goods and services and their prices in the market. Demand theory forms the basis for the demand curve, which relates consumer desire to the amount of goods available. As more of a good or service is available, demand drops and so does the equilibrium price.

Demand theory highlights the role that demand plays in price formation, while supply-side theory favors the role of supply in the market.

Understanding Demand Theory

Demand is simply the quantity of a good or service that consumers are willing and able to buy at a given price in a given time period. People demand goods and services in an economy to satisfy their wants, such as food, healthcare, clothing, entertainment, shelter, etc. The demand for a product at a certain price reflects the satisfaction that an individual expects from consuming the product. This level of satisfaction is referred to as utility and it differs from consumer to consumer. The demand for a good or service depends on two factors: (1) its utility to satisfy a want or need, and (2) the consumer’s ability to pay for the good or service. In effect, real demand is when the readiness to satisfy a want is backed up by the individual’s ability and willingness to pay.

Demand theory is one of the core theories of microeconomics. It aims to answer basic questions about how badly people want things, and how demand is impacted by income levels and satisfaction (utility). Based on the perceived utility of goods and services by consumers, companies adjust the supply available and the prices charged.

Built into demand are factors such as consumer preferences, tastes, choices, etc. Evaluating demand in an economy is, therefore, one of the most important decision-making variables that a business must analyze if it is to survive and grow in a competitive market. The market system is governed by the laws of supply and demand, which determine the prices of goods and services. When supply equals demand, prices are said to be in a state of equilibrium. When demand is higher than supply, prices increase to reflect scarcity. Conversely, when demand is lower than supply, prices fall due to the surplus.

Key Takeaways

• Demand theory describes the way that changes in the quantity of a good or service demanded by consumers affects its price in the market,
• The theory states that the higher the price of a product is, all else equal, the less of it will be demanded, inferring a downward sloping demand curve.
• Likewise, the more demand that occurs, the greater the price will be for a given supply.
• Demand theory places primacy on the demand side of the supply-demand relationship.

The Law of Demand and the Demand Curve

The law of demand introduces an inverse relationship between price and demand for a good or service. It simply states that as the price of a commodity increases, demand decreases, provided other factors remain constant. Also, as the price decreases, demand increases. This relationship can be illustrated graphically using a tool known as the demand curve.

The demand curve has a negative slope as it charts downward from left to right to reflect the inverse relationship between the price of an item and the quantity demanded over a period of time. An expansion or contraction of demand occurs as a result of the income effect or substitution effect. When the price of a commodity falls, an individual can get the same level of satisfaction for less expenditure, provided it’s a normal good. In this case, the consumer can purchase more of the goods on a given budget. This is the income effect. The substitution effect is observed when consumers switch from more costly goods to substitutes that have fallen in price. As more people buy the good with the lower price, demand increases.

Sometimes, consumers buy more or less of a good or service due to factors other than price. This is referred to as a change in demand. A change in demand refers to a shift in the demand curve to the right or left following a change in consumers’ preferences, taste, income, etc. For example, a consumer who receives an income raise at work will have more disposable income to spend on goods in the markets, regardless of whether prices fall, leading to a shift to the right of the demand curve.

The law of demand is violated when dealing with Giffen or inferior goods. Giffen goods are inferior goods that people consume more of as prices rise, and vice versa. Since a Giffen good does not have easily available substitutes, the income effect dominates the substitution effect.

Supply and Demand

The law of supply and demand is an economic theory that explains how supply and demand are related to each other and how that relationship affects the price of goods and services. It's a fundamental economic principle that when supply exceeds demand for a good or service, prices fall. When demand exceeds supply, prices tend to rise.

There is an inverse relationship between the supply and prices of goods and services when demand is unchanged. If there is an increase in supply for goods and services while demand remains the same, prices tend to fall to a lower equilibrium price and a higher equilibrium quantity of goods and services. If there is a decrease in supply of goods and services while demand remains the same, prices tend to rise to a higher equilibrium price and a lower quantity of goods and services.

The same inverse relationship holds for the demand of goods and services. However, when demand increases and supply remains the same, the higher demand leads to a higher equilibrium price and vice versa.

Supply and demand rise and fall until an equilibrium price is reached. For example, suppose a luxury car company sets the price of its new car model at $200,000. While the initial demand may be high, due to the company hyping and creating buzz for the car, most consumers are not willing to spend $200,000 for an auto. As a result, the sales of the new model quickly fall, creating an oversupply and driving down demand for the car. In response, the company reduces the price of the car to $150,000 to balance the supply and the demand for the car to ultimately reach an equilibrium price.

What is the amount of goods and services a consumer is willing and able to buy a various prices during a given time period?

Which term refers to the amount of a good or service?

What is the amount of goods or services that producers are willing and able to sell?