Demand refers to the quantity of a commodity a consumer is willing to purchase under different conditions. The demand for a commodity depends on a number of factors like the price of the commodity, income of the consumer, the price of substitute commodities, the price of complements, the preference for the good by the consumers, fashion trends, seasonality, and such others. Therefore, the demand function can be written as:
QD = F(P, Y, PS, PC, T, O)
Where, QD: Quantity demanded
P: Price of the commodity
PS: Price of the Substitute commodity
PC: Price of the complementary commodity
T: Consumers’ tastes and preferences
O: Other factors.
When we analyze demand in economics we consider demand to determined by its own price and we consider other factors to remain constant in the review period. The change in other factors results in the parametric shift of the demand curve. Thus, the demand function now becomes:
QD = F(P, Y, PS, PC, T, O)
Where Y, PS, PC, T, O denote the fixed factors.
So, for our analysis we define demand as the quantity demanded of a commodity at different prices. When we say ‘quantity demanded’ we refer to the quantity the consumer is willing to purchase at a particular price. When we say ‘demand’ we refer to the quantities purchased at different prices. That means demand refers to schedule that relates price to the quantity demanded.
According to the law of demand, as the price of a commodity falls, the quantity demanded rises and vice versa. The demand curve, which represents the relationship between the quantities demanded and the price, is downward sloping. A fall in price leads to an expansion in demand denoted by a rightward movement along the demand curve.(Pindyck and Rubinfield, 2008). A rise in price leads to a contraction in demand, an upward movement along the demand curve. This movement is shown in figure 1.
Figure 1: Movement along the demand curve
A change in the other factors that affect demand leads an increase or decrease in demand represented by a shift in the demand curve. Suppose the income of the consumer increases. This means the consumer will be willing to buy more goods at each price level. So the demand curve shifts rightwards. A fall in income shifts the demand curve leftwards. (Koutsoyiannis, 2003).Similarly, a rise in the price of the substitute product will lead to a rightward shift of the demand curve and vice versa.
Figure 2: Shift in the demand curve
Now, let us consider the given example. In this example, air travel and travel by car are two substitute commodities. So, price of one product will affect the demand for the other. Let us study the effect on the demand for driving to vacation and on the number of highway fatalities under the three scenarios:
- An increase in the price of gasoline: Gasoline is a complement of car travel as a car runs on gasoline. A rise in the price of gasoline will lead to a decrease in the demand for travelling by car. The decrease in demand is represented by a leftward shift in the demand curve as shown in figure 2. This reduction in demand will also reduce the number of highway fatalities.
- A large reduction in rental rates for passenger vans: A large reduction in the rental rates for passenger vans will increase the demand for travel by passenger vans. The demand for driving to vacation will be reduced if the rented vans are taken along with a driver. If people rent vans to drive on their own, driving to vacation becomes cheaper. This will lead to a downward movement along the demand curve as shown in figure 1. The highway fatality rate will increase. As the travel by road will increase.
- An increase in Airfare: Air travel is a substitute of the travel by car. An increase in airfare will increase the demand for driving to vacation. The demand curve will shift to the right. Number of highway fatalities will increase.
Let us now consider another example. We construct three scenarios and analyze the effect on the demand for PCs.(The New York Times, November 6. 2014). Studies have revealed that the recent surge in the innovations of androids and i-phones, i-pads, etc has reduced the demand for PCs to a great extent. Let us now discuss the three scenarios:
- An increase in the tariff rate for cell-phone services: This increase in the price of cell-phone services will make people reduce the net surfing through their phones or communicating through the internet on their phones. The demand for PCs will increase as the net surfing through the PC on a broad band becomes cheaper. The demand for PCs will increase. The demand curve will shift rightwards.
- A decrease in the price of computer OS and other software packages: Computer soft-wares are complements of PCs. A reduction in such software packages will increase the demand for PCs. The demand curve will shift rightwards.
- A reduction in tax on the sale of PCs: The reduction in sales tax will reduce the price of PCs. There will be expansion in demand along the demand curve as in figure 1.
Pindyck, R. and Rubinfield, D. (2008). Microeconomics. 7th edition. New Jersey:
Pearson Prentice Hall.
Koutsoyiannis, A. (2003). Modern Microeconomics. 2nd Edition. Macmillan
The Newyork Times, November 6, 2014. Daily Report:Microsoft Offering Free Mobile Version of Office.