Demand

What is demand?

Demand is the amount of something that people will want to and be able to buy at a certain price or time. The things that people demand are classified as either goods or services. Producers are the people and companies that sell those goods or services, and the consumers are the people and companies that buy them. 

How do you measure demand?

Demand is measured by a value called it's Price Elasticity of Demand (PED) which is somewhere between 0 and infinity (it goes in both ways- negative and positive). This is basically a measure of how much the demand of a good will change if the price changes. A good can have one of five main types of PED: perfectly elastic, relatively elastic, perfectly inelastic, relatively inelastic, and unitary. All of these new terms may seem a little scary, but they're nothing to be worried about! Elasticity is just how the demand of a good/service will change with price. 

Calculation

You take a percentage change in the quantity demanded and then divide it by the percentage change in price that caused it. This is your PED value.

Elastic goods

The more elastic something is, the bigger the change in demand will be in relation to demand. These are generally luxury goods like fizzy drinks or cinema tickets because if the price goes up, you can easily miss out on them (it works the other way though, too- if the price of cinema tickets was reduced to £3 you'd go a lot more often). 

If a good is perfectly elastic any change in price will mean that demand goes straight to nothing. It seems weird, imagine having a game that people will only buy at £45.97 exactly, and nothing else!

Inelastic goods

These are basically the opposite of elastic goods: the change in demand will be smaller in relation the change in price. These are things that are seen as necessities are like this because people will still buy them even if they are expensive. Petrol is the best example that there is of an inelastic good as people have become almost completely reliant on the stuff. 

A perfectly inelastic good is one that will always have the same demand, regardless of price. Because there is a finite amount of money in existence, it's possible to say that something has the same demand all the time!

Unitary Demand

This is when demand changes are directly proportional to prices changes.

Why do we care?

Well, you don't really have to care but it can help you better understand how far more complex economic functions really work. Also, firms use PED diagrams all the time to work out what will happen when they make decisions. 

Discussion Point

If you were the CEO of a firm, what elasticity would you want your goods to have and why?