Market Demand

Market Demand

We can now move from the analysis of one individual’s consumption
decisions to consider the demand for one product from all
consumers added together.
Following a price change, if the decisions of all consumers in a
specific market for, say, cups of coffee are aggregated together we can
thus construct a market demand curve. There may be some individuals
whose decisions run contrary to all others (e.g. an individual who
chooses point r, in the analysis described in Figure 2.5) but their
influence on the overall market will be negligible. The normal
demand relationship is illustrated in Figure 2.6 – as the price of
Price
Demand for coffee

Quantity
Figure 2.7 Price-elastic demand.
Box 2.3 Calculating price-elasticity
Actually, since the flatness or steepness of any curve illustrated
depends entirely on how scale is represented on the vertical axis,
it is best to refer to the elasticity of demand mathematically. If a
5 per cent fall in price is met by a 20 per cent extension in
demand then we can say that demand is very price-elastic.
Elasticity is measured as the ratio of the percentage change in
quantity to the percentage change in price – in this case equal to
20/5 or equal to 4.
coffee increases, demand for it will fall, and vice versa, assuming all
other factors influencing the market remain unchanged.
The slope of the demand curve illustrated is important. It shows
just exactly how much demand will contract as price increases a
little or, conversely, how much demand extends as price falls.
The slope of the demand curve thus helps to represent the
responsiveness, or ELASTICITY, of demand consequent to a change in
price. All things being equal, the flatter the demand curve the more
responsive or price-elastic is demand. Figure 2.7 shows a situation
where a small change in price is met by a large change in the
quantity demanded (Box 2.3).
© 2004 Tony Cleaver
Generally speaking, the more one good can be substituted for
another in your pattern of spending, the more price-elastic it is
likely to be in demand. If Shell petrol goes up in price, for example,
and no other prices change then most consumers will simply switch
to alternatives such as BP or Esso. Demand for Shell oil is highly
price-elastic. If all oil goes up in price, however, then consumers
have no substitute for this vital commodity and market demand
may not change much at all in the short run. Demand for all oil is
price-inelastic.