lesson
An Economist’s Definition Of Demand
Introduction
After you have worked through this section of the learning unit, you should be able to:
- describe the meaning of demand used in economics
The concept “demand” means different things to different people and economists attach a particular meaning to it.
Which one of the following definitions of demand from the Merriam-Webster dictionary do you think is the closest to an economist's idea of demand?
In the discussion that follows you will see that to be part of the demand for something, it is not enough to forcefully ask for, or to have a strong need for it. You also need to back this up with the ability to pay for it.
When we dealt with the economic problem of scarcity we indicated that that this problem is the result of our unlimited needs and wants that have outstripped our limited resources. This is not the same as saying that our demand for goods and services is unlimited. We all have unlimited needs and wants, but not all of us have the ability or necessary purchasing power to buy the goods and services we need and want. And, according to economists, if you do not have the purchasing power to back up your need or want, you are not part of the demand for a good or service.
For traders demand is the willingness and ability to buy stocks and shares
Protestors also have demands but these are not what we study in economics
It is this condition to be able to purchase or ability to pay that gives weight to the economist's definition of demand. This ability to pay for goods and services, in turn, depends on income. The higher the income of a person or household, the more goods and services they can afford to buy, and the more needs and wants they can satisfy.
In economics, we say that a person has the necessary purchasing power. Hence to be part of the demand for a good or service, you must have the necessary purchasing power. Without the ability to pay for a good or service, you are excluded from the market. Is this fair? Think about it. We will return to this topic later.
If you are thinking about starting your own business, remember the following:
If you plan to sell a good or service, you must be sure that people not only want it, but are also willing and have the ability to pay for it. If people want a good or service but do not have the ability to pay for it, they are not part of the demand for it. Moreover, if there is no demand for it, then you will not be able to make a profit and your business will fail. For example, only those people who want a car and are willing and able to pay for it, create the demand for cars.
An economist would define the demand for a good or service as follows:
Demand is the quantities of a good or service that potential buyers are willing and able to purchase during a certain period.
The first aspect of the definition that you should note is that it refers to the quantities of a good or service (i.e. how much of a good or service is demanded). We will use the symbol Qd to denote quantity demanded.
Potential buyers refer to the intentions of the buyers of the good or service and not what they actually do.
Watch the following video clip for more on the importance of the intentions of buyers:
Willing to purchase refers to the condition that you are willing to pay for it. If you want something and you have the means to pay for it but you are not willing to pay the price for it, you are not part of the demand for it.
And then there is the important qualification that you must be able to purchase the good or service.
Watch the following clip for more on willingness and ability to buy:
The last part of the definition deals with the time period. For demand to be meaningful, it is necessary for the time period to be stated as the quantity demanded per day, per week, per month and so on. For instance, saying that the quantity of tomatoes demanded is ten tons per week is significantly different from saying it is ten tons per year.
The main aspects of an economist's definition of demand are therefore as follows:
- It differs from needs and wants
- It indicates willingness to purchase
- It indicates ability to purchase
- It is for a specified period
Activity
Do the following activity to see if you understand the meaning of the term “demand”:
Indicate whether the following statements are true or false:
Demand is simply another term for wants. In other words, if a consumer demands a good, it simply means that he or she wants the good.
Think again. The statement is false.
Demand is the outcome of decisions about which wants to satisfy, given the available means. If you demand something (in the economic sense), it means you intend buying it and that you have the means (i.e. purchasing power) to do so. In other words, when we talk about demand, we are referring to the quantities of a good or service that potential buyers are willing and able to buy.
The statement is indeed false.
Demand is the outcome of decisions about which wants to satisfy, given the available means. If you demand something (in the economic sense), it means you intend buying it and that you have the means (i.e. purchasing power) to do so. In other words, when we talk about demand, we are referring to the quantities of a good or service that potential buyers are willing and able to buy.
The demand for a product refers to the quantities of the product that potential buyers are willing and able to buy.
The statement is indeed true.
When economists talk about demand, they are referring to the quantities of a good or service that potential buyers are willing and able to buy.
Think again. The statement is true.
When economists talk about demand, they are referring to the quantities of a good or service that potential buyers are willing and able to buy.
The demand for a product refers to the quantities of the product that potential buyers are willing and able to buy.
The statement is indeed true.
When economists talk about demand, they are referring to the quantities of a good or service that potential buyers are willing and able to buy.
Think again. The statement is true.
When economists talk about demand, they are referring to the quantities of a good or service that potential buyers are willing and able to buy.
Demand refers to the plans of households, not to events that have already occurred.
The statement is indeed true.
It deals with the intentions of households and not what they will actually do.
Think again. The statement is true.
It deals with the intentions of households and not what they will actually do.
Which of the following persons are part of the demand for ice cream?
It is not not Ghandi,
Ghandi is not part of the demand since he does not have the ability to pay for it.
It is not Peter.
Peter likes it and has the ability to pay for it, but is not willing to do so.
Luke is part of the demand for ice cream. because he wants it, is willing to pay for it and has the ability to do so
It is not Joyce, Joyce does not want it and is therefore not part of the demand for it.
You intend starting a business that supplies chicken burgers in your area. A friend of yours mentions that he thinks it is a good idea because he knows that in this area there are 5 000 people who like chicken burgers. Is this information sufficient to conclude that there is a high demand for chicken burgers in this area?
Think again.
You still need to know whether they are willing and able to pay for the chicken burgers. Only then can you form an opinion about the demand for chicken burgers.
You indeed need more information.
You still need to know whether they are willing and able to pay for the chicken burgers. Only then can you form an opinion about the demand for chicken burgers.