How much demand

Economists sometimes describe this as a downward-shifting supply curve leading to movement down the demand curve. Further major declines in cost per copy seemed unlikely because paper costs were expected to remain flat, and the data indicated little increase in price elasticity, even if cost per copy fell further.

So the team concluded that usage growth per level of economic performance was likely to continue the flattening trend begun in growth in copy paper consumption would be largely a function of economic growth, not cost declines as in the past. The team then reviewed several econometric services forecasts to develop a base case economic forecast. Similar studies have been performed in other industries.

Here the team divided demand into its consuming industries and then asked experts in each industry for production forecasts. Total demand for components was projected on the assumption that it would move parallel to a weight-averaged forecast of these customer industries. In another example, a team forecasting demand for maritime satellite terminals extrapolated past penetration curves for each of five categories of ships. These curves were then adjusted for major changes in the shipping industry e.

Knowing the drivers of demand is crucial to the success of any total-market demand forecast. In , as I mentioned earlier, most electric utilities used an incomplete total-demand forecast to predict robust demand growth. The team divided electricity demand into the three traditional categories: residential, commercial, and industrial. It then profiled differences in residential demand because of more efficiency in home appliances and changes in home size and the ratio of multi-unit to single-family dwellings.

Industrial demand was analyzed by evaluating the future of several key consuming industries, paying special attention to changes in their total production and electricity use. In , forecasters in the U. One company, however, did a more detailed demand forecast that showed that growth would soon flatten out.

It found that more than two-thirds of white-collar workers either did not require PCs in their jobs—actors and elevator operators, for instance—or were supported mostly by inexpensive terminals linked to large computers, as in the case of many clerical workers. The potential market was not big enough to support the growth rate.

Indeed, the market began to flatten the next year. Forecasting total demand became crucial for another company that was thinking about acquiring a maker of video games.

The analysis made clear that the main target market, upper-income families with children, was already well penetrated. This finding convinced management that demand would fall and that the proposed acquisition did not make sense. The dramatic decline in video game sales shortly thereafter confirmed the wisdom of this judgment. Managers who rely on single-point demand forecasts run dangerous risks.

Some of the macroeconomic variables behind the forecasts could be wrong. Despite the best analysis, moreover, the assumptions behind the other demand drivers could also be wrong, especially if discontinuities loom on the horizon.

They are more likely to identify potential risks and discontinuities—developments in competing technologies, in customer industry competitiveness, in supplier cost structures—than those who do not. So once a baseline forecast is complete, the challenge is to determine how far it could be off target. At one level, such a sensitivity analysis can be done by simply varying assumptions and quantifying their impact on demand.

But a more targeted approach usually provides better insight. Begin such an analysis by thinking through and quantifying the areas of greatest strategic risk. Next, gauge the likelihood of such a development. In the white paper example, the baseline forecast called for continued market growth, though below historical levels. In any particular year, demand could fluctuate with the economy, but the critical question was whether demand would at some point begin a long decline.

If so, the companion supply-curve analysis indicated that prices would probably fall dramatically. The team created two scenarios of a gradual decline, one based largely on changes in the economy and the other on changes in assumed end-use trends. These scenarios showed what would make demand fall e.

The forecasting framework outlined above can work for both comprehensive and simple assessments, but there are different ways to carry out these analyses. Managers can invest a lot of time in such analyses—the paper example took about 8 man-weeks and the large-scale electricity forecast about 14 man-weeks.

Some companies have forecasting departments who work year-round on these subjects. The more thorough, though time-consuming, approach generates greater confidence, and the effort will be appropriate where the demand projection can significantly influence corporate strategy whether to make a several hundred million dollar capital investment, for example , or where there is great uncertainty about total demand.

Often, however, the issues are not complicated, time is limited, or the total demand forecast is not important enough to merit that commitment for example, the company is looking to add a couple of points to its small market share.

In such cases, managers should proceed quickly and inexpensively. Even the limited approaches can yield insights. Furthermore, beginning the demand analysis process can help managers determine whether important demand issues exist that should be analyzed in greater depth.

Change in Quantity Demanded Qd. This does not change the demand schedule or the demand curve. Demand does not change. But it does result in a movement along the SAME demand curve. Change in Demand D. When there is a change in demand itself we get a new demand schedule and curve. When we say that the demand curves shift to the right, it means that we have to change the numbers on the demand schedule.

For the same prices, the quantities increase. A decrease in demand will then shift the demand curve to the LEFT. For each price on the demand schedule, the quantities decrease. Many students want to draw the arrows perpendicular to the demand curve. Don't do this. Always draw your arrows horizontally because this indicates the the prices are the same, and only the quantities change. If these change we get a new demand schedule and curve.

To understand why prices are what they are, and why they change, we need to understand very well how these determinants move the demand curve. This is where it all begins. In our definition of demand we held these things constant ceteris paribus , but in the real world these things do change, changing demand, and ultimately changing prices.

So let's look at each determinant individually to understand how they each affect demand. Pe -- expected price. If you expect the price to go up in the future demand today will increase shift to the right.

For example, if we read that there will be a new tax on vodka starting next week, people will want to buy more now before the price increases. Retailers understand this. They want you to expect the price to increase in the future so you'll buy it today. The opposite happens when you expect the price to go down in the future. In the past when my wife and I were shopping whenever I put something in the cart, she would take it out and put it back on the shelf! I'd ask, "why are you doing that?

She would say that she expected it to go on sale soon and we should wait until it does. If you expect the price to go down in the future demand today decreases. But, whenever I put something in the cart, she would take it out saying that she expects it to go on sale soon. After awhile I got a little upset, when I'd ask her about the items she put in the cart and she'd say that they were on sale last week and we missed it.

Finally, I went to talk to the store manager and explained the situation to him. He saved our marriage by explaining that most chain store have a policy stating that if an item goes on sale after you have purchased it, you can bring in the receipt within 30 days and get a refund. Retailers understand how price expectations affect demand. Pog -- price of other goods. Substitute goods are goods where if you buy more of one, you buy less of the other one. Examples of substitutes include vodka and gin, hot dogs and hamburgers, chicken and beef, Coca-Cola and Pepsi.

Let's look at Coke and Pepsi. If the price of Coke increases it will increase the demand for Pepsi the graph shifts to the right. I f you are going to buy a can of Coke, you may walk right past the Pepsi machine, but when you notice that the price of Coke has increased, you'll probably turn around and buy the Pepsi. You weren't going to buy Pepsi before, but now, at the same price, you are willing to buy it. So the demand for Pepsi has increased.

The demand curve has shifted to the right. At the same prices, the quantities demanded are greater. If the price of Coke increases, what happens to the demand for Coke? Price does not change demand as we have defined it but it will change the quantity demanded. You've seen a good example of this in your local grocery store.

For example, I may want to buy some coffee. So I go to the coffee aisle and grab a can of Folgers and continue down the aisle. But at the end of the aisle I see a display of Maxwell House coffee on sale! What do I do with the Folgers in my shopping cart? I take it out of my cart and put it on the Maxwell House display. Haven't you seen various brands mixed in with such displays? The demand for Folgers decreased I no longer want it at that price, so I take it out of my cart because the price of Maxwell House decreased.

Complementary goods are goods where if you buy more of one you also buy more of the other one. Let's say that you want to eat hot dogs tonight and you go to your local grocery store and put a bag of buns in your cart and head down the aisle to the wieners. When you get to the wiener display you notice that their price has increased significantly so you decide not to eat hot dogs. What are you going to do with the buns? You should put them back, but if you are like many people you'll put them in the wiener display and move on quickly.

But the point is, you were going to buy the buns at their present price they were already in your cart , but when you learned the price of hot dogs increased your demand for buns decreased the demand curve shifted to the left - at the same prices the quantities demanded decreased. P of wieners D of buns. Of course, if the price of one product decreases cheaper film developing , the demand for its complement film increases. P of one product D of its compliment.

Independent goods are goods where if the price of one changes, it has no effect on the demand for to other one. For example, what happens to the demand for paper clips if the price of surfboards increases?

P of one product D of its compliment P of one product D of its compliment. I -- income. Income D for normal goods Income D for normal goods. So if incomes increase, the demand curve for restaurant meals, and cars, and boats, will shift to the right.

At the same prices people will buy more. Income D for inferior goods Income D for inferior goods. The term "inferior good" does not mean they are of low quality. There is an inverse relationship between income and demand. Examples of inferior goods might include used clothing, potatoes, rice, maybe generic foods. If you lose your job so your income decreases you may shop for clothes at the Salvation Army Thrift Store demand for used clothing increases.

What is a normal good for one consumer might be an inferior good for another. For example, if the income of one family increases they may buy a second small car a normal good , but for another family, an increase in income may mean that they don't buy a small car an inferior good anymore and they buy a mini van instead. Npot D Npot D. Often economists say that an increase in the "number of consumers" will increase demand. But, if K-Mart has a sale on Pepsi price of Pepsi decreases what happens to the number of consumers buying Pepsi?

It will increase. The law of demand says that if price goes down, quantity demanded goes up. So, if they have more customers because the price went down, what happens to demand?

Nothing - price does not change the demand schedule. T -- tastes and preferences. Supply is more difficult for students to understand than demand. We are all consumers demanders , but few of us own a business suppliers. So, remember to think of yourself as a business owner when we discuss supply. Supply is a schedule which shows the various quantities businesses are willing and able to offer for sale at various prices in a given time period, ceteris paribus.

Supply is NOT the quantity available for sale. This is the way the term is often used in the popular press. Supply is the whole schedule with many prices and many quantities. Just like with demand, there is a difference between a change in quantity supplied and a change in supply itself.

So, if the price increases what happens to supply? Price does not change supply, it changes quantity supplied, because supply means the whole schedule with various prices and various quantities.

If we plot these points remember any point on a graph simply represents two numbers We get the graph below. If we assume there are quantities and prices in-between those on the schedule we get a supply curve.

The law of supply states that there is a direct relationship between price and quantity supplied. In other words, when the price increases the quantity supplied also increases. This is represented by an upward sloping line from left to right. Why is the law of supply true? Why is the supply curve upward sloping?

Why will businesses supply more pizzas only id the price is higher? I think it is just common sense. If you want the pizza places to work harder and longer and produce more pizzas, you have to pay them more, per pizza. But economists, as social science, want to explain common sense. We know businesses behave this way, but why? There are two explanations for the law of supply and both have to do with increasing costs.

Businesses require a higher price per pizza to produce more pizzas because they have higher costs per pizza. First, there are increasing costs because of the law of increasing costs. In a previous lecture we explained that the production possibilities curve is concave to the origin because of the law of increasing costs. Let's say a pizza place is just opening.

The owner figures that they will need five employees. After putting an ad in the paper there are twenty applicants. Five have had experience working in a pizza place before.

They came to the interview clean and on time. The other fifteen had no work experience. Many came late. A few were caught steeling pepperoni on the way out. One spilled flour all over the floor. Which applicants will be hired? Of course it will be the five with experience and the other fifteen will be rejected because they would be too costly to hire.

NOW, if the pizza place wants to produce more pizzas they will need more workers. This means they will have to hire some of those who were rejected because they were more costly less experienced, etc. So, they will only hire the more costly employees if they can get a higher price to cover the higher costs.

Second, there are increasing costs because some resources are fixed. This should not make sense to you. Why would there be increasing costs if we use the same quantity of some resource? These price reductions in turn will stimulate a higher quantity demanded. So, if the price is above the equilibrium level, incentives built into the structure of demand and supply will create pressures for the price to fall toward the equilibrium.

At this lower price, the quantity demanded increases from to as drivers take longer trips, spend more minutes warming up the car in the driveway in wintertime, stop sharing rides to work, and buy larger cars that get fewer miles to the gallon. When the price is below equilibrium, there is excess demand , or a shortage —that is, at the given price the quantity demanded, which has been stimulated by the lower price, now exceeds the quantity supplied, which had been depressed by the lower price.

In this situation, eager gasoline buyers mob the gas stations, only to find many stations running short of fuel. Oil companies and gas stations recognize that they have an opportunity to make higher profits by selling what gasoline they have at a higher price.

As a result, the price rises toward the equilibrium level. Read Demand, Supply, and Efficiency for more discussion on the importance of the demand and supply model. A demand schedule is a table that shows the quantity demanded at different prices in the market. A demand curve shows the relationship between quantity demanded and price in a given market on a graph. The law of demand states that a higher price typically leads to a lower quantity demanded.

A supply schedule is a table that shows the quantity supplied at different prices in the market. A supply curve shows the relationship between quantity supplied and price on a graph. The law of supply says that a higher price typically leads to a higher quantity supplied. The equilibrium price and equilibrium quantity occur where the supply and demand curves cross. The equilibrium occurs where the quantity demanded is equal to the quantity supplied.

If the price is below the equilibrium level, then the quantity demanded will exceed the quantity supplied. Excess demand or a shortage will exist. If the price is above the equilibrium level, then the quantity supplied will exceed the quantity demanded.

Excess supply or a surplus will exist. In either case, economic pressures will push the price toward the equilibrium level. Review Figure 3. And what about the quantity supplied?

Is there a shortage or a surplus in the market? If so, of how much? Review Figure 3 again. Will the quantity supplied be lower or higher? Costanza, Robert, and Lisa Wainger.

September 2, European Commission: Agriculture and Rural Development. Radford, R. These results are due to the laws of demand and supply, respectively. Skip to content Chapter 3. Demand and Supply. Learning Objectives By the end of this section, you will be able to: Explain demand, quantity demanded, and the law of demand Identify a demand curve and a supply curve Explain supply, quantity supply, and the law of supply Explain equilibrium, equilibrium price, and equilibrium quantity.

Is demand the same as quantity demanded? Is supply the same as quantity supplied? Self-Check Questions Review Figure 3. Review Questions What determines the level of prices in a market? What does a downward-sloping demand curve mean about how buyers in a market will react to a higher price? Will demand curves have the same exact shape in all markets? If not, how will they differ? Will supply curves have the same shape in all markets? What is the relationship between quantity demanded and quantity supplied at equilibrium?