Demand
There isn't a single, universally accepted "formula" for demand and price that works in all situations. The relationship between them is complex and depends on many factors. However, here are some ways to think about it:
1. General Relationship:
The most basic principle is the Law of Demand, which states that, all other things being equal, as the price of a good or service increases, the quantity demanded decreases, and vice versa.
2. Demand Curve:
Graphically, the relationship is represented by a demand curve. This curve typically slopes downward, illustrating the inverse relationship between price and quantity demanded.
3. Price Elasticity of Demand (PED):
This measures the responsiveness of the quantity demanded to a change in price. It is calculated as:
PED = (% Change in Quantity Demanded) / (% Change in Price)
- Elastic Demand (PED > 1): A change in price leads to a proportionally larger change in quantity demanded.
- Inelastic Demand (PED < 1): A change in price leads to a proportionally smaller change in quantity demanded.
- Unit Elastic Demand (PED = 1): A change in price leads to an equal proportional change in quantity demanded.
Understanding elasticity is crucial because it informs businesses how price changes will affect their revenue.
4. Demand Function:
Economists sometimes use a demand function to represent the relationship mathematically. A simplified linear demand function might look like this:
Qd = a - bP
- Qd = Quantity demanded
- a = A constant representing the quantity demanded when the price is zero (the intercept on the quantity axis).
- b = The slope of the demand curve (how much quantity demanded changes for each unit change in price).
- P = Price
This is a simplification. Real-world demand functions can be much more complex, incorporating factors like income, prices of related goods, consumer tastes, and more.
Important Considerations:
- Ceteris Paribus: The Law of Demand and the demand curve assume ceteris paribus, meaning "all other things being equal." In reality, many factors change simultaneously, which can shift the entire demand curve.
- Shifts vs. Movements: A change in price causes a movement along the demand curve. A change in other factors (like income or tastes) causes a shift of the entire demand curve.
- Market Structure: The relationship between price and demand also depends on the market structure (e.g., perfect competition, monopoly, oligopoly).
Sources:
- Investopedia: Law of Demand
- Khan Academy: Law of demand
- Corporate Finance Institute: Price Elasticity of Demand
Yes, the market demand schedule typically illustrates an inverse relationship between price and quantity demanded. This relationship is a fundamental principle in economics known as the law of demand.
Here's a breakdown of why this inverse relationship exists:
- Price and Quantity: As the price of a good or service increases, the quantity demanded by consumers generally decreases, and vice versa.
- Demand Schedule: A demand schedule is a table that lists the quantity of a good or service consumers are willing and able to purchase at various prices.
The law of demand is supported by two main effects:
- Substitution Effect: When the price of a good rises, consumers may switch to cheaper alternatives.
- Income Effect: When the price of a good rises, consumers' purchasing power decreases (their real income falls), leading them to buy less of the good.