Demand in a Competitive Market by Omkar Abhyankar

 In previous articles we discussed how producers produce their goods. Moving forward, we will focus on how a competitive market works. A competitive market is a market consisting of many sellers and many buyers where all sellers sell the same goods and the buyers purchase those goods. There are two major concepts relating to the competitive market: Supply and Demand. Supply is how much the sellers are willing to supply across various prices while demand is the quantity of goods which the buyer’s are willing to buy at across various prices. In this article we will focus on the concept of demand. Demand relates the price of a good with how much of a good is demanded (the quantity demanded). The price and the quantity demanded of a good have an inverse relationship. This is because if the price of a good was very high, then the buyers in the market would not buy as much of that good because of its high cost; as a result, the quantity demanded for that good would be very low. Conversely, if the price was very low, then people would buy more of the good because of its very cheap cost; as a result, the quantity demanded for the good would be very high. This inversly proportional relationship between the price and the quantity demanded is defined by a law known as the Law Of Demand. Using this relationship between the price of a good and the quantity demanded of a good based on the law of demand, let’s look at a graph of a demand curve.

This graph models the demand in a competitive market for chairs. From this graph we notice that the Y axis is labeled “price” representing the price of each chair while the X axis is labeled “quantity demanded”, representing the number of chairs demanded. The curve in the graph is called the Demand Curve and therefore is labeled “D”. Let’s interpret the meaning of the two labeled points on this graph. We can see that at Point A, the price is $100, a very high value, while the quantity demanded is 3 chairs, a very low value. This means that if the price of each chair in the market is $100, then the buyers in the market would be willing to purchase only 3 chairs. At Point B, the price is a very low value of $2 while the quantity demanded is a very high value of 50 chairs. This means that if the price of a chair in the market was $2, then the buyers in the market would be willing to buy 50 chairs. As shown by these two points, we again see that inverse relationship between the price and the quantity demanded as a high price correlates with a smaller quantity demanded for a good while a low price correlates to a larger quantity demanded for a good. The demand curve is downwards sloping to model this inverse relationship between price and the quantity demanded. It is important to note that prices can change. For an example, suppose the current market price is $100. Then, we can see based on Point A that the quantity of chairs demanded would be 3. Now suppose the price falls to $2. This means that from Point A, we would move to Point B, the point at which the market price is $2 and the quantity of chairs demanded is 50. We can notice that a change in price causes a movement along the curve. If the price increases, then the market would move to the left along the demand curve while if the price decreases, then the market would move to the right along the demand curve. In the next article titled “Changes in Demand”, we will investigate how the entire demand for a good can change and how that change can be shown graphically.