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Two Approaches to Demand


Two Approaches to Demand, page 2

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The Graphical Approach

Economists graphically represent the relationship between product price and quantity demanded with a demand curve. Typically, demand curves are downwards sloping, because as price increases, buyers are less likely to be willing or able to purchase whatever is being sold. Each individual buyer can have their own demand curve, showing how many products they are willing to purchase at any given price, as shown below. This graph shows what Jim's demand curve for graham crackers might be:

Jim's Demand Curve for Graham Crackers

To find out how many boxes of graham crackers Jim will buy for a given price, extend a perpendicular line from the price on the y-axis to his demand curve. At the point of intersection, extend a line from the demand curve to the x-axis (perpendicular to the x-axis). Where it intersects the x-axis (quantity) is how many boxes of graham crackers Jim will buy. For instance, in the graph above, Jim will buy 3 boxes when the price is $2 a box.

Aggregate Demand and Horizontal Addition

Typically, economists don't look at individual demand curves, which can vary from person to person. Instead, they look at aggregate demand, the combined quantities demanded of all potential buyers. To do this, add the quantities which buyers are willing to buy at different prices. For instance, if Jim and Marvin are the only two buyers in the market for graham crackers, we would add how many they are willing to buy at price p=1 and record that as aggregate demand for p=1. Then we would add how many they are willing to buy at price p=2 and record that as aggregate demand for p=2, and so on. This results in the following graph of aggregate demand for graham crackers:

Jim and Marvin's Demand Curves for Graham Crackers
Aggregate Demand Curve for Graham Crackers

This method is called horizontal addition because you look at a price level, and add the separate quantities demanded across that price level, giving you total quantity demanded for that price.

There are many factors that can affect demand quantity, including income, prices, and preferences. Let's look at one good to see how this works. How much are you willing to pay for a cold soda? If you recently got a raise at your job, you might not mind buying a pricier soda, even if you don't need it. Your friend who has less money, however, might pick a generic brand, or they might stick with tap water. Below are possible demand curves for you (with your big raise) and your friend (without your big raise). Note that you are willing to buy more soda than your friend is:

2 Demand Curves for Soda

What if soda cost a dollar yesterday and costs two dollars today? That might make you think twice about getting the same soda you drank yesterday. Likewise, if it cost two dollars yesterday and a dollar today, you might be more willing to buy the soda than usual. We can see this on the graph on a single demand curve. When the price is a dollar, the quantity demanded is higher than when the price is two dollars. What this means in the real world is that if two companies charge different prices for the same good, the company that charges a lower price will get more customers. (Exceptions to this general rule may occur when there is a real or perceived difference in quality of the goods being sold).