Dictionary Definition
demand
Noun
1 the ability and desire to purchase goods and
services; "the automobile reduced the demand for buggywhips"; "the
demand exceeded the supply" [ant: supply]
2 an urgent or peremptory request; "his demands
for attention were unceasing"
3 a condition requiring relief; "she satisfied
his need for affection"; "God has no need of men to accomplish His
work"; "there is a demand for jobs" [syn: need]
4 the act of demanding; "the kidnapper's
exorbitant demands for money"
5 required activity; "the requirements of his
work affected his health"; "there were many demands on his time"
[syn: requirement]
Verb
1 request urgently and forcefully; "The victim's
family is demanding compensation"; "The boss demanded that he be
fired immediately"; "She demanded to see the manager"
2 require as useful, just, or proper; "It takes
nerve to do what she did"; "success usually requires hard work";
"This job asks a lot of patience and skill"; "This position demands
a lot of personal sacrifice"; "This dinner calls for a spectacular
dessert"; "This intervention does not postulates a patient's
consent" [syn: necessitate, ask, postulate, need, require, take, involve, call for] [ant:
obviate]
3 claim as due or just; "The bank demanded
payment of the loan" [syn: exact]
4 lay legal claim to
5 summon to court
6 ask to be informed of; "I demand an
explanation"
User Contributed Dictionary
English
Etymology
From demander.Extensive Definition
In economics, supply and
demand describes market relations between prospective sellers and
buyers of a
good. The supply and demand model
determines price and quantity sold in a market. This model is fundamental
in microeconomic
analysis, and is used as a foundation for other economic models and
theories. It predicts that in a competitive
market, price will function to equalize the quantity demanded
by consumers, and the quantity supplied by producers, resulting in
an economic
equilibrium of price and quantity. The model incorporates other
factors changing equilibrium as a shift of demand and/or
supply.
The fundamentals
Strictly speaking, the model
of supply and demand applies to a type of market called perfect
competition in which no single buyer or seller has much effect
on prices, and prices are known. The quantity of a product supplied
by the producer and the quantity demanded by the consumer are
dependent on the market price
of the product. The law of supply states that quantity supplied is
related to price. It is often depicted as directly proportional to
price: the higher the price of the product, the more the producer
will supply, ceteris
paribus ("all other things being equal"). The law of demand is
normally depicted as an inverse relation of quantity demanded and
price: the higher the price of the product, the less the consumer
will demand, ceteris paribus. The respective relations are called
the supply curve and demand curve, or supply and demand for
short.
The laws of supply and demand
state that the equilibrium market price and quantity of a
commodity is at the intersection of consumer demand and
producer supply. At this point, quantity supplied equals quantity
demanded (as shown in the figure ). If the price for a good is
below equilibrium, consumers demand more of the good than producers
are prepared to supply. This defines a shortage of the good. A
shortage results in producers increasing the price until
equilibrium is reached. If the price of a good is above
equilibrium, there is a surplus of the good. Producers are
motivated to eliminate the surplus by lowering the price, until
equilibrium is reached.
Supply schedule
The supply schedule, graphically represented by the supply curve, is the relationship between market price and amount of goods produced. In short-run analysis, where some input variables are fixed, a positive slope can reflect the law of diminishing marginal returns, which states that beyond some level of output, additional units of output require larger amounts of input. In the long-run, where no input variables are fixed, a positively-sloped supply curve can reflect diseconomies of scale.For a given firm in a perfectly
competitive industry, if it is more profitable to produce than
to not produce, profit is maximized by producing just enough so
that the producer's marginal
cost is equal to the market price of the good.
Occasionally, supply curves
bend backwards. A well known example is the
backward bending supply curve of labour. Generally, as a
worker's wage increases, he
is willing to work longer hours, since the higher wages increase
the marginal
utility of working, and the opportunity
cost of not working. But when the wage reaches an extremely
high amount, the employee may experience the
law of diminishing marginal utility. The large amount of money
he is making will make further money of little value to him. Thus,
he will work less and less as the wage increases, choosing instead
to spend his time in leisure. The backwards-bending supply curve
has also been observed in non-labor markets, including the market
for oil: after the skyrocketing price of oil caused by the 1973 oil
crisis, many oil-exporting countries decreased their production
of oil.
The supply curve for public
utility production companies is unusual. A large portion of
their total costs are in the form of fixed costs. The supply curve
for these firms is often constant (shown as a horizontal
line).
Another postulated variant of
a supply curve is that for child labor. Supply will increase as
wages increase, but at a certain point a child's parents will pull
the child from the child labor force due to cultural pressures and
a desire to concentrate on education. The supply will not increase
as the wage increases, up to a point where the wage is high enough
to offset these concerns. For a normal demand curve, this can
result in two stable equilibrium points - a high wage and a low
wage equilibrium point.
Demand schedule
The demand schedule, depicted graphically as the demand curve, represents the amount of goods that buyers are willing and able to purchase at various prices, assuming all other non-price factors remain the same. The demand curve is almost always represented as downwards-sloping, meaning that as price decreases, consumers will buy more of the good.The main determinants of
individual demand are: the price of the good, level of income,
personal tastes, the population (number of people), the government
policies, the price of substitute
goods, and the price of complementary
goods.
The shape of the aggregate
demand curve can be convex or concave, possibly depending on
income distribution.
As described above, the demand
curve is generally downward sloping. There may be rare examples of
goods that have upward sloping demand curves. Two different
hypothetical types of goods with upward-sloping demand curves are a
Giffen
good (a sweet inferior, but staple, good)
and a Veblen good
(a good made more fashionable by a higher price).
Changes in market equilibrium
Practical uses of supply and demand analysis often center on the different variables that change equilibrium price and quantity, represented as shifts in the respective curves. Comparative statics of such a shift traces the effects from the initial equilibrium to the new equilibrium.Demand curve shifts
When consumers increase the quantity demanded at a given price, it is referred to as an increase in demand. Increased demand can be represented on the graph as the curve being shifted outward. At each price point, a greater quantity is demanded, as from the initial curve D1 to the new curve D2. More people wanting coffee is an example. In the diagram, this raises the equilibrium price from P1 to the higher P2. This raises the equilibrium quantity from Q1 to the higher Q2. A movement along the curve is described as a "change in the quantity demanded" to distinguish it from a "change in demand," that is, a shift of the curve. In the example above, there has been an increase in demand which has caused an increase in (equilibrium) quantity. The increase in demand could also come from changing tastes, incomes, product information, fashions, and so forth.If the demand decreases, then
the opposite happens: an inward shift of the curve. If the demand
starts at D2, and decreases to D1, the price will decrease, and the
quantity will decrease. This is an effect of demand changing. The
quantity supplied at each price is the same as before the demand
shift (at both Q1 and Q2). The equilibrium quantity, price and
demand are different. At each point, a greater amount is demanded
(when there is a shift from D1 to D2).
Supply curve shifts
When the suppliers' costs change for a given output, the supply curve shifts in the same direction. For example, assume that someone invents a better way of growing wheat so that the cost of wheat that can be grown for a given quantity will decrease. Otherwise stated, producers will be willing to supply more wheat at every price and this shifts the supply curve S1 outward, to S2—an increase in supply. This increase in supply causes the equilibrium price to decrease from P1 to P2. The equilibrium quantity increases from Q1 to Q2 as the quantity demanded increases at the new lower prices. In a supply curve shift, the price and the quantity move in opposite directions. If the quantity supplied decreases at a given price, the opposite happens. If the supply curve starts at S2, and shifts inward to S1, the equilibrium price will increase, and the quantity will decrease. This is an effect of supply changing. The quantity demanded at each price is the same as before the supply shift (at both Q1 and Q2). The equilibrium quantity, price and supply changed.When there is a change in
supply or demand, there are four possible movements. The demand
curve can move inward or outward. The supply curve can also move
inward or outward.
See also: Induced
demand
Elasticity
A very important concept in understanding supply and demand theory is elasticity. In this context, it refers to how supply and demand respond to various factors. One way to define elasticity is the percentage change in one variable divided by the percentage change in another variable (known as arc elasticity, which calculates the elasticity over a range of values, in contrast with point elasticity, which uses differential calculus to determine the elasticity at a specific point). It is a measure of relative changes.Often, it is useful to know
how the quantity demanded or supplied will change when the price
changes. This is known as the
price elasticity of demand and the
price elasticity of supply. If a monopolist decides to increase
the price of their product, how will this affect their sales
revenue? Will the increased unit price offset the likely decrease
in sales volume? If a government imposes a tax on a good, thereby increasing
the effective price, how will this affect the quantity
demanded?
Another distinguishing feature
of elasticity is that it is more than just the slope of the
function. For example, a line with a constant slope will have
different elasticity at various points. Therefore, the measure of
elasticity is independent of arbitrary units (such as gallons vs.
quarts, say for the response of quantity demanded of milk to a
change in price), whereas the measure of slope only is
not.
One way of calculating
elasticity is the percentage change in quantity over the associated
percentage change in price. For example, if the price moves from
$1.00 to $1.05, and the quantity supplied goes from 100 pens to 102
pens, the slope is 2/0.05 or 40 pens per dollar. Since the
elasticity depends on the percentages, the quantity of pens
increased by 2%, and the price increased by 5%, so the price
elasticity of supply is 2/5 or 0.4.
Since the changes are in
percentages, changing the unit of measurement or the currency will
not affect the elasticity. If the quantity demanded or supplied
changes a lot when the price changes a little, it is said to be
elastic. If the quantity changes little when the prices changes a
lot, it is said to be inelastic. An example of perfectly inelastic
supply, or zero elasticity, is represented as a
vertical supply curve. (See that section below)
Elasticity in relation to
variables other than price can also be considered. One of the most
common to consider is income. How would the demand for
a good change if income increased or decreased? This is known as
the
income elasticity of demand. For example, how much would the
demand for a luxury car increase if average
income increased by 10%? If it is positive, this increase in demand
would be represented on a graph by a positive shift in the demand
curve. At all price levels, more luxury cars would be
demanded.
Another elasticity sometimes
considered is the
cross elasticity of demand, which measures the responsiveness
of the quantity demanded of a good to a change in the price of
another good. This is often considered when looking at the relative
changes in demand when studying complement
and substitute
goods. Complement goods are goods that are typically utilized
together, where if one is consumed, usually the other is also.
Substitute goods are those where one can be substituted for the
other, and if the price of one good rises, one may purchase less of
it and instead purchase its substitute.
Cross elasticity of demand is
measured as the percentage change in demand for the first good that
occurs in response to a percentage change in price of the second
good. For an example with a complement good, if, in response to a
10% increase in the price of fuel, the quantity of new cars
demanded decreased by 20%, the cross elasticity of demand would be
-2.0.
Vertical supply curve (Perfectly Inelastic Supply)
It is sometimes the case that
a supply curve is vertical: that is the quantity supplied is fixed,
no matter what the market price. For example, the surface area or
land of
the world is fixed. No matter how much someone would be willing to
pay for an additional piece, the extra cannot be created. Also,
even if no one wanted all the land, it still would exist. Land
therefore has a vertical supply curve, giving it zero elasticity
(i.e., no matter how large the change in price, the quantity
supplied will not change).
Supply-side
economics argues that the aggregate supply function – the total
supply function of the entire economy of a country – is relatively
vertical. Thus, supply-siders argue against government stimulation
of demand, which would only lead to inflation with a vertical
supply curve.
Other markets
The model of supply and demand also applies to various specialty markets.The model applies to wages, which are determined by the
market for labor.
The typical roles of supplier and consumer are reversed. The
suppliers are individuals, who try to sell their labor for the
highest price. The consumers of labors are businesses, which try to
buy the type of labor they need at the lowest price. The
equilibrium price for a certain type of labor is the
wage.
The model applies to
interest rates, which are determined by the money
market. In the short term, the money supply
is a vertical supply curve, which the central bank
of a country can control through monetary
policy. The demand for money intersects with the money supply
to determine the interest rate.
Other market forms
The supply and demand model is used to explain the behavior of perfectly competitive markets, but its usefulness as a standard of performance extends to other types of markets. In such markets, there may be no supply curve, such as above, except by analogy. Rather, the supplier or suppliers are modeled as interacting with demand to determine price and quantity. In particular, the decisions of the buyers and sellers are interdependent in a way different from a perfectly competitive market.A monopoly is the case of a
single supplier that can adjust the supply or price of a good at
will. The profit-maximizing monopolist is modeled as adjusting the
price so that its profit is maximized given the amount that is
demanded at that price. This price will be higher than in a
competitive market. A similar analysis can be applied when a good
has a single buyer, a monopsony, but many sellers.
Oligopoly
is a market with so few suppliers that they must take account of
their actions on the market price or each other. Game theory
may be used to analyze such a market.
The supply curve does not have
to be linear. However, if the supply is from a profit-maximizing
firm, it can be proven that curves-downward sloping supply curves
(i.e., a price decrease increasing the quantity supplied) are
inconsistent with perfect competition in equilibrium. Then supply
curves from profit-maximizing firms can be vertical, horizontal or
upward sloping.
Positively-sloped demand curves?
Standard microeconomic assumptions cannot be used to disprove the existence of upward-sloping demand curves. However, despite years of searching, no generally agreed upon example of a good that has an upward-sloping demand curve (also known as a Giffen good) has been found. Some suggest that luxury cosmetics can be classified as a Giffen good. As the price of a high end luxury cosmetic drops, consumers see it as an low quality good compared to its peers. The price drop may indicate lower quality ingredients, thus consumers would not want to apply such an inferior product to their face.Lay economists sometimes
believe that certain common goods have an upward-sloping curve. For
example, people will sometimes buy a prestige good (eg. a luxury
car) because it is expensive, a drop in price may actually reduce
demand. However, in this case, the good purchased is actually
prestige,
and not the car itself. So, when the price of the luxury car
decreases, it is actually decreasing the amount of prestige
associated with the good (see also Veblen good).
However, even with downward-sloping demand curves, it is possible
that an increase in income may lead to a decrease in demand for a
particular good, probably due to the existence of more attractive
alternatives which become affordable: a good with this property is
known as an inferior
good.
Negatively-sloped supply curve
There are cases where the price of goods gets cheaper, but more of those goods are produced. This is usually related to economies of scale and mass production. One special case is computer software where creating the first instance of a given computer program has a high cost, but the marginal cost of copying this program and distributing it to many consumers is low (almost zero).Empirical estimation
Demand and supply relations in a market can be statistically estimated from price, quantity, and other data with sufficient information in the model. This can be done with simultaneous-equation methods of estimation in econometrics. Such methods allow solving for the model-relevant "structural coefficients," the estimated algebraic counterparts of the theory. The Parameter identification problem is a common issue in "structural estimation." Typically, data on exogenous variables (that is, variables other than price and quantity, both of which are endogenous variables) are needed to perform such an estimation. An alternative to "structural estimation" is reduced-form estimation, which regresses each of the endogenous variables on the respective exogenous variables.Macroeconomic uses of demand and supply
Demand and supply have also been generalized to explain macroeconomic variables in a market economy, including the quantity of total output and the general price level. The Aggregate Demand-Aggregate Supply model may be the most direct application of supply and demand to macroeconomics, but other macroeconomic models also use supply and demand. Compared to microeconomic uses of demand and supply, different (and more controversial) theoretical considerations apply to such macroeconomic counterparts as aggregate demand and aggregate supply. Demand and supply may also be used in macroeconomic theory to relate money supply to demand and interest rates.Demand shortfalls
A demand shortfall results from the actual demand for a given product being lower than the projected, or estimated, demand for that product. Demand shortfalls are caused by demand overestimation in the planning of new products. Demand overestimation is caused by optimism bias and/or strategic misrepresentation.History
The phrase "supply and demand" was first used by James Denham-Steuart in his Inquiry into the Principles of Political Economy, published in 1767. Adam Smith used the phrase in his 1776 book The Wealth of Nations, and David Ricardo titled one chapter of his 1817 work Principles of Political Economy and Taxation "On the Influence of Demand and Supply on Price".In The Wealth of Nations,
Smith generally assumed that the supply price was fixed but that
its "merit" (value) would decrease as its "scarcity" increased, in
effect what was later called the law of demand. Ricardo, in
Principles of Political Economy and Taxation, more rigorously laid
down the idea of the assumptions that were used to build his ideas
of supply and demand. Antoine
Augustin Cournot first developed a mathematical model of supply
and demand in his 1838
Researches on the Mathematical Principles of the Theory of
Wealth.
During the late 19th century
the marginalist school of thought emerged. This field mainly was
started by Stanley
Jevons, Carl Menger,
and Léon
Walras. The key idea was that the price was set by the most
expensive price, that is, the price at the margin. This was a
substantial change from Adam Smith's thoughts on determining the
supply price.
In his 1870 essay "On the
Graphical Representation of Supply and Demand", Fleeming
Jenkin drew for the first time the popular graphic of supply
and demand which, through Marshall, eventually would turn into the
most famous graphic in economics.
The model was further
developed and popularized by Alfred
Marshall in the 1890 textbook Principles of Economics. Along
with Léon
Walras, Marshall looked at the equilibrium point where the two
curves crossed. They also began looking at the effect of markets on
each other.
See also
- Aggregate demand
- Aggregate supply
- Artificial demand
- Barriers to entry
- Consumer surplus
- Consumer theory
- Deadweight loss
- Demand shortfall
- Economic surplus
- Effect of taxes and subsidies on price
- Elasticity
- Externality
- Foundations of Economic Analysis by Paul A. Samuelson
- History of economic thought
- "invisible hand"
- Labor shortage
- Microeconomics
- Producer's surplus
- Protectionism
- Profit
- Rationing
- Real prices and ideal prices
- Say's Law
- Supply shock
- An Inquiry into the Nature and Causes of the Wealth of Nations by Adam Smith
References
External links
- "Marshallian Cross Diagrams and Their Uses before Alfred Marshall: The Origins of Supply and Demand Geometry" by Thomas Humphrey (via the Richmond Fed)
- Supply and Demand book by Hubert D. Henderson at Project Gutenberg.
- Price Theory and Applications by Steven E. Landsburg ISBN 0-538-88206-9
- An Inquiry into the Nature and Causes of the Wealth of Nations, Adam Smith, 1776 http://www.gutenberg.net/etext/3300
- By what is the price of a commodity determined?, a brief statement of Karl Marx's rival account http://www.marxists.org/archive/marx/works/1847/wage-labour/ch03.htm
- The Economic Motivation of Open Source Software: Stakeholder Perspectives, Dirk Riehle, 2007 http://www.riehle.org/computer-science/research/2007/computer-2007-article.html
- Supply and Demand by Fiona Maclachlan and Basic Supply and Demand by Mark Gillis, The Wolfram Demonstrations Project.
demand in Arabic: عرض و
طلب
demand in Persian: عرضه و
تقاضا
demand in Bulgarian: Търсене
и предлагане
demand in Danish: Udbud og
efterspørgsel
demand in German:
Marktgleichgewicht
demand in Spanish: Oferta y
demanda
demand in Esperanto: Mendado
kaj ofertado
demand in French: Offre et
demande
demand in Korean: 수요와
공급
demand in Croatian:
Potražnja
demand in Croatian:
Ponuda
demand in Indonesian:
Penawaran dan permintaan
demand in Icelandic: Framboð
og eftirspurn
demand in Italian: Domanda e
offerta
demand in Hebrew: היצע
וביקוש
demand in Lao: ການສະໜອງ ແລະ
ຄວາມຕ້ອງການ
demand in Malay
(macrolanguage): Bekalan dan keperluan
demand in Dutch: Vraag en
aanbod
demand in Japanese:
需要と供給
demand in Polish:
Popyt
demand in Portuguese: Lei da
oferta e da procura
demand in Simple English:
Quantity demanded
demand in Romanian: Cerere şi
ofertă
demand in Slovak:
Ponuka
demand in Slovenian: Ponudba
in povpraševanje
demand in Finnish: Kysyntä ja
tarjonta
demand in Swedish: Utbud och
efterfrågan
demand in Thai:
อุปสงค์และอุปทาน
demand in Ukrainian: Попит та
пропозиція
demand in Urdu:
رسد
demand in Vietnamese: Nguyên
lý cung - cầu
demand in Chinese:
供给和需求
Synonyms, Antonyms and Related Words
address, admission, admission fee,
anchorage, application, apply for,
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for, ask questions, asking, assess, at once, authority, authorize, bare necessities,
be hurting for, be indicated, beg leave, behest, bespeak, bid, bid come, bill of sale,
birthright, blackmail, bone of contention,
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brook no denial, burden with, burdening, call, call away, call back, call
for, call forth, call in, call out, call together, call up,
carfare, catechism, cellarage, challenge, charge, charge for, charges, charging, cite, claim, clamor for, coerce, command, compel, conjugal right, conjure, conjure up, constrain, convene, convoke, cover charge, coveted, crave, cross-interrogatory,
cross-question, cry for, cry out for, debating point, demand for,
desideration,
desideratum,
desirable, desire, desired, dictate, direct, divine right, dockage, doing, droit, due, dues, enjoin, enquire, entrance fee, essential, essentials, evoke, exact, exaction, exactment, expressed desire,
extort, extortion, faculty, fail, fare, fasten upon, fee, feeler, file for, force, freight with, freighting, have occasion
for, hire, immediately, impetration, impose, impose on, impose upon,
imposing an onus, imposition, in demand,
inalienable right, inconsiderateness,
inconvenience,
indent, indispensable, inflict on,
inflict upon, infliction, inquire, inquire of, inquiry, insist, insist on, insistence, interest, interpellate, interrogation, interrogative, interrogatory, invoke, issue, issue an ultimatum,
lack, lay, lay down, lay on, laying on,
leader, leading question,
leave no option, levy,
license fee, loading,
loading down, make a demand, make a request, make a requisition,
make application, make dutiable, make inquiry, make obligatory,
market, marketability, mass
market, moot point, must,
must item, muster, muster
up, natural right, necessaries, necessitate, necessities, necessity, need, need for, needed, oblige, obtrusiveness, occasion, on call, on demand,
order, order up, outcry, outlet, page, petition, pilotage, place, place an order, point at
issue, point in question, popular, portage, postulate, power, preconize, prerequire, prerequirement, prerequisite, prerogative, prescribe, prescription, presumptive
right, presumptuousness,
pretense, pretension, pro rata,
problem, proper claim,
property right, propose a question, propound a question, prorate, put, put down, put in for, put in
requisition, put on, put queries, put upon, query, question, question at issue,
question mark, quodlibet, recall, rend from, rending, request, require, require an answer,
requirement,
requisite, requisition, retail, right, ripping, saddle with, sale, salvage, scot, scot and lot, screw, send after, send for,
serve, set, shot, solicit, stick for, storage, subject to, subpoena, summon, summon forth, summon up,
summons, take, take doing, take no denial,
task, tasking, tax, taxing, tear from, tearing, the necessary, the
needful, tie-in, tithe,
title, toll, topic, towage, trial balloon, trouble, turnover, unwarranted demand,
use, vested interest, vested
right, vexed question, want, want doing, want to know,
wanted, warn, weight down with, weighting, wharfage, whistle for, wholesale, wish, without delay, wrench, wrench from, wrenching, wrest, wresting, wring, wring from, wringing, yoke
with