Understanding the demand curve

Let’s say I bump into you on the road, and ask you a question.

“What if”, I say, ” a bottle of Coke was priced at 100 rupees? How many bottles would you consume per day?”

“You must be nuts,” I hope would be your response. “Even in the middle of summer, I wouldn’t want to pay a hundred rupees for a bottle of Coke.”

“Well, fine”, I would say, for I am a reasonable man. “What about fifty rupees per Coke?”

“Well, maybe, if it was really hot and I was really thirsty – I can imagine paying fifty rupees for a Coke.”

And so our conversation would proceed, one hypothetical price point after another, each lower than the one before it. If you found yourself willing to buy a higher quantity of Coke for a lesser price per unit, congratulations, for you would then be obeying one of the most fundamental laws in economics, that of the law of demand.

Simply put, the law of demand states that there is an inverse relationship between the price (per unit) of something, and the quantity demanded of that thing. The higher the price, the lower your demand. The lower the price, the higher the demand. Do you find yourself tempted to buy that flat screen TV when Amazon or Flipkart offer it on sale? That’s what we’re talking about – that’s the inverse relationship between quantity demanded and price.

Now, this might seem like the simplest thing on the planet – the fact that there is an inverse relationship between the price of a good and the quantity demanded of that good. And you’re right, this isn’t all that complicated.

What makes thinking about the demand curve not all that easy are the nuances associated with it. For example, that demand curve we spoke about at the beginning was your demand curve for a bottle of Coke. But your taste for Coke might be weaker than mine – I might be positively addicted to the stuff, and would be willing to pay a hundred rupees for it, if that’s what it took. And maybe a third person might not want Coke at any price altogether – she just can’t stand the stuff.

So each of us, we now realize, have different demand curves for Coke – and when I say each of us, it’s not just the three people we’ve been speaking about so far, but all of us – all 1.3 billion. Because when we speak about the market demand for Coke, it’s all our demand curves rolled up into one.

The second difficulty associated with thinking about demand curves is the fact that the demand may change over time. At noon in the middle of May, my demand for Coke might be pretty high, but at 3 a.m. on a cold freezing night in the middle of December, it might be nonexistent.

Third, my demand might change with age. As a teenager, I might drink a half dozen bottles of Coke during the day (although that would be a really bad idea), while my demand might not be quite as high when I’m in my fifties.

In other words, my demand for Coke depends upon price, time of day, month of year, my own age – and we could go on and on. And that’s true for all of us – and so calculating or creating a demand curve for Coke for all of us at one go is a very, very difficult thing indeed.

And we’re only getting started!

 

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