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Demand

Introduction

If you go to Urban Outfitters today, you can find a Champion brand sweater for 70 dollars. Ten years ago, if you went to Walmart, you could find that same sweater for 15 dollars. How is that possible? As you may have guessed, fashion has changed, and people's tastes have changed.

In those ten years, demand for Champion clothes has increased.

What is demand?

Demand is a function of many variables that determines what quantity people demand. I will explain with a few examples

Law of Demand

 The y-axis is price, the x-axis is quantity demanded. 

The y-axis is price, the x-axis is quantity demanded. 

If you keep everything else constant, an increase in price will result in a decrease of quantity demanded (and vice versa).

Why?

Let's say Apple sold iPhones for $100. Apple store lines would extend for miles. Now, let's say Apple sold iPhones for $5000. Way fewer people would want them now. The opportunity cost of purchasing a product increases, and fewer people can justify the purchase as the cost increases.

Exceptions

People will buy medicine regardless of the price if it is necessary to survive. Epipens are exorbitantly expensive, but they still exist.

People will continue to buy Mercedes vs. cars 1/10 of their price, because they value the status or quality that comes with the increased price.

Quantity Demanded vs. Demand

Screen Shot 2018-09-09 at 2.23.05 PM.png

Quantity demanded is the amount people are willing to buy at a given price. Demand is the entire curve shown above. Change in quantity demanded is just a movement along the demand curve. Change in demand is a movement of the curve itself.

What affects quantity demanded?

Price is the only factor that affects quantity demanded. That is essential to understand.

What affects demand?

Demand depends on a variety of different factors:

Tastes and Preferences

If Champion sweaters go out of style, fewer people will want them, regardless of the price. 

Income

If people make more money, they can spend a smaller portion of their money on each purchase, meaning they purchase more, so demand increases. 

There is an important caveat. Inferior goods like ramen noodles or used cars decrease in demand when income increases, because people buy higher quality goods. People will buy normal dinners or new cars instead, and those goods are called normal goods, because they behave normally in response to a change in income.

Prices of Related Goods

If the price of oranges skyrockets, people will buy less of them. That is expected. However, those same people will switch to a substitute good: apple. The demand for apples increases. So, if the price of a substitute good increases, the demand for the other good increases.

If bicycles become very cheap, more people will buy them. So, they will also buy more bicycle helmets, a complementary good. If a complementary's good price increases, the demand for the good decreases.

Number of buyers

If the number of buyers increases, then there are more people, so more people would buy at every price-point.

Expectations

Let's say it's June, and you want a fur coat. You anticipate the price will increase in the winter, so you buy it now. When consumers anticipate price to increase, demand right now goes up (and vice versa).

Supply

Inflation