Demand - Curve & Diminishing Returns

Demand is often represented as the desire to have or own a certain item. Using this definition, anyone who would like to own a car could be said to demand one. In order for demand to be counted in the marketplace, however, the mere desire for a product is not enough.  This desire must coincide with the ability and willingness to pay. Only people that meet this criteria can be said to truly have demand. It is these individuals who will compete with others that have similar demands for the available products.

To illustrate demand we have two tools, the demand schedule and demand curve. The demand schedule is T-chart that shows quantity demanded at a given price. The demand curve uses the values provided by the the demand schedule to create a chart plotting the quantity demanded versus the price. While gathering precise data isn’t always easy, these tools provide a powerful method of analyzing the type of consumer demand for a product.

For practically every product or service, an increase in price reduces demand. Inversely, a reduction in price provides an increase in demand. This is known as the Law of Demand. Stated simply, there is an inverse relation between change in price and quantity demanded.

Despite a reduction in price’s power to increase demand. This increase in demand is not infinite. The term Marginal Utility addresses this issue. Marginal utility is the benefit or usefulness an individual receives from an additional unit of a product. A product or service is purchased because we feel it is useful and will provide satisfaction. However, as more of a product or service is used, we begin to encounter the principle of diminishing marginal utility. This principle states that the extra satisfaction we get from using additional quantities of the product begins to diminish. This means that we will be willing to pay less for each additional unit of a product.

Law of demand

Demand schedule and curve

Marginal utility and the law of diminishing returns

Objectives:

• Describe and illustrate the concept of demand
• Explain how demand and utility are related

Homework: None today.