Demand on markets

In economic theory, the market is the generic term of what is assumed to be the general (and notional) structure and way of forming economic relations between individuals. Individuals can supply or demand various goods and services throughout this structure called the market. Then, the price is supposed to be formed by the confrontation between demands and supplies. Therefore, we have to understand what do demand and supply mean when we want to analyze the functioning of the economic system.

Demand

The amount of any particular good or service that individuals wish to purchase in a given period is called the demand (or the quantity demanded). However, in economics, demand has special meanings and does not a priori correspond to an effective quantity. First, quantity demanded is a desired quantity. It is the amount households wish to purchase, given the price of the commodity, other prices, their incomes, their tastes, and so on. It may be different from the amount that households actually succeed in purchasing. If sufficient quantities are not available, the amount that households wish to purchase may exceed the amount they actually purchase. To distinguish these two concepts, the term quantity demanded is used to refer to desired purchases, and a phrase such as quantity actually bought or quantity exchanged is used to refer to actual purchases. Second, desired does not refer to idle dreams but to effective demands -that is, to the amounts people are willing to buy, given the price they must pay for the commodity. Third, quantity demanded refers to a continuous flow of purchases. It must, therefore, be expressed as so much per period of time: 1 million units per day, 7

million per week, or 365 million per year. For example, being told that the quantity of new television sets demanded (at current prices) in the United States is 500,000 means nothing unless you are also told the period of time involved. Five hundred thousand television sets demanded per day would be an enormous rate of demand; 500,000 per year would be a very small rate. The amount of some commodity that all households wish to buy in a given time period is influenced by the following important variables:

- Commodity’s own price;

- Average household income;

- Prices of related commodities (the effect of the prices of other commodities on

the considered good depends on the relations among them: if there is a possibility

of substitution or complementarity among different commodities);

- Tastes;

- Distribution of income among households;

- Population size (or market size).

It is difficult to determine the separate influence of each of these variables if we consider what happens when everything changes at once. Instead, we consider the influence of the variables one at a time. To do this, we hold all but one of them constant. Then we let the selected variable vary and study how it affects quantity demanded. We can do the same for each of the other variables in turn, and in this way we can come to understand the importance of each. Once this is done, we can combine the separate influences on the variables to discover what happens when several things change in the same time-as they often do. Holding all other influencing variables constant is often described by the words “other things being equal”, or “other things given”, or by the equivalent Latin phrase ceteris paribus. When economists speak of the influence of the price of wheat on the quantity of wheat demanded, ceteris paribus, they refer to what a change in the price of wheat would do to the quantity of wheat demanded if all other forces that influence the demand for wheat did not change. We are interested in developing a theory of how prices are determined. To do this we need to study the relationship between the quantity demanded of each commodity and that commodity’s own price. This requires that we hold all other influences constant and ask: How will the quantity of a commodity demanded vary as its own price varies? As basic economic hypothesis is that the price of a commodity and the quantity that will be demanded are related negatively, other things being equal. That is, the lower the price, the higher is the quantity demanded, and the higher the price, the lower the quantity demanded. Now consider what happens if income, tastes, population, and the prices of all other commodities remain constant and the price of only one commodity changes. As the price goes up, that commodity becomes an increasingly expensive way to satisfy a want. Some households will stop buying it altogether; others will buy smaller amounts; still others may continue to buy the same quantity. Because many households will switch wholly or partly to other commodities to satisfy the same want, less will be bought of the commodity whose price has risen. As meat becomes more expensive, for example, households may to some extent switch to meat substitutes; they may also forgo meat at soma meals and eat less meat at others. Conversely, as the price goes down, the commodity becomes a cheaper method of satisfying a want. Households will buy more of it. Consequently, they will buy less of similar commodities whose prices have not fallen and which as a result have become expensive relative to the commodity in question. When a bumper tomato harvest drives prices down, shoppers switch to tomatoes and cut their purchases of many other vegetables that now look relatively more expensive.