The law of demand guides this relationship. It states that the quantity demanded will drop as the price rises, ceteris paribus or “all other things being equal.” Those other things that must remain equal are the determinants of demand: the price of related goods, income, tastes, and expectations. There’s an additional determinant for aggregate demand: the number of potential buyers in the market. We’ll review how to describe demand schedules in terms of price elasticity along with an example of how you can use a demand schedule to project how much beef a family would buy over the course of a year.
The Demand Schedule Reveals Price Elasticity
Demand schedules allow economists to predict the quantity demanded at given prices. That relationship between price and demand is known as the elasticity. By studying the numbers in a demand schedule, one can quantify the elasticity of a good or service. If the price elasticity number is high, then it’s called elastic demand. Like a stretchy rubber band, the quantity demanded moves easily with a little change in prices. An example of this in everyday life could be frozen pizzas. If the price of a frozen pizza drops just 25%, you might buy three times as much as you normally would on your next grocery trip. You know you’ll use the extra pizzas eventually, and you can put them in the freezer until you need them. Inelastic demand is the opposite. Here, a price drop won’t stimulate the quantities purchased. An example of inelastic demand can be found at the gas pump. You can’t significantly change the amount of driving you need to do each week, even if the price of gas goes up. Similarly, you probably won’t drive twice as much in a week just because gas prices fell by 50%.
Demand Schedule: Beef
Here’s a real-life example using ground beef. The average demand elasticity for beef calculated by the USDA is -0.699. This means that as the price rises 1.0%, the quantity demanded falls 0.699%. In part because of two droughts in a row, the price of ground beef rose dramatically in 2014. The first drought in 2012 drove up food prices and forced cattle ranchers to slaughter their cows to prevent them from starving. In 2014, another drought drove grain prices up again. Ranchers hadn’t yet rebuilt their herds, so prices for beef simply rose. Climate change is just one of the factors of rising food prices. When oil prices rise, as they did in 2013 and 2014, it can be another reason why food prices are so high. For this example, let’s say a family of four bought 10 pounds of ground beef in January to make hamburgers, meatloaf, and chili. All other things being equal, here’s the demand schedule showing how they would reduce the quantity bought by 0.699% for every 1.0% the price rose.
Changing Determinants of Demand
If the determinants of demand other than the price change, it shifts the entire demand curve. That’s because a whole new demand schedule needs to be created to show the new relationship between price and quantity. The demand curve shifts for a particular good or service when there are changes not only in price, but also in buyers’ incomes, trends and tastes, future expectations, and prices of alternative choices.
