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Effective demand
Imagine walking into your favourite store and spotting a sale on that beauty item or tech gadget you've been eyeing. You're willing to pay for it, and luckily, you have just enough money saved up!
This situation illustrates a concept in economics called effective demand. But what exactly is effective demand, and how does it relate to the demand schedules and curves that shape our buying decisions?
🤔 What makes Demand Effective?
Two things make demand effective:
1️⃣ A consumer needs to have a willingness to buy the item
2️⃣ A consumer needs to have the ability to buy the item
Example: Students with enough income or financial support from wealthy parents can effectively demand a university education. However, if students don't have parental backing, they may not have the effective demand to study at university, even if they are willing to. Without the financial ability to afford tuition, their demand remains potential (latent) demand, which is demand not yet expressed in the marketplace.
Effective Demand definition:
- Effective demand is the demand from consumers that is backed up with an ability to pay. It refers to the willingness and ability of consumers to purchase goods at different prices.
- When we think about the demand curve, we are thinking about effective demand.
📊 Demand Schedules/Curves
A demand schedule is a table showing the quantity demanded at each price. It typically has these two columns:
- A column that lists the price for a product in increasing or decreasing order.
- A column that lists the quantity of the product desired at that particular price.
Types of Demand Schedules
- Individual Demand Schedule: Shows the demand of one customer for a particular good at various prices.
- Market Demand Schedule: Summation of individual demand schedules, representing the total demand in the market.
👤 Individual Demand Schedules and Individual Demand
An Individual demand schedule shows the demand of just 1 customer for a particular good in connection with its price. A graphical representation of the individual demand schedule is called the individual demand curve.
- The x-axis represents demand while the y-axis represents the price of a given good
Example:
Let’s take shortbread as an example. There is a customer called Katy. Below we list the price for shortbread in increasing order and the individual quantity of the product desired. Here is an example of the individual demand schedule:
Point | Price per shortbread (£) | Katy’s Quantity Demanded |
a | 1 | 10 |
b | 1.5 | 8 |
c | 2 | 6 |
d | 2.5 | 4 |
e | 3 | 2 |
- At £1 per shortbread, Katy buys 10 shortbreads.
- At £2, she buys 6 shortbreads.
- At £3, she only buys 2 shortbreads.
This example illustrates the law of demand, which states that, all else being equal, as the price of a good decreases, the quantity demanded increases, and as the price increases, the quantity demanded decreases.
We can use the demand schedule to compute a demand cure:
🛒 Market Demand Schedules and Market Demand
Market demand schedule refers to the summation of individual demand schedules. This is the total amount that everyone would buy of something at a certain price. It's like adding up the desires of all the individual customers.
- A graphical representation of the market demand schedule is called the market demand curve which is what you would have typically seen!
Example:
Suppose there are only 3 buyers of shortbread in the market – Katy, Ben and Nkechi. The market schedule and market demand curve can be seen below: