Demand Schedule Explained With Real Life Example
The demand schedule shows exactly how many units of a good or service will be bought at each price. It is the underlying data that the demand curve represents.
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.
The exact relationship between price and quantity demanded is the elasticity. It is a number that tells you how much the quantity demanded will react to the price. If the number is high, then it's called elastic demand. That’s because, like a stretchy rubber band, the quantity demanded moves easily with a little change in prices. An example of this would be ground beef. If prices drop just 25 percent, you might buy three times as much as you normally would. That’s because you know you'll use it and you'll put the extra in the freezer.
Inelastic demand is the opposite. That's because a drop in price isn't able to increase the quantities purchased. An example is gasoline. You can't change the amount you need each week, even if the price goes up. Similarly, you probably won't drive twice as much just because the price fell by 50 percent.
Here's a real-life example using ground beef. The USDA has calculated that the demand elasticity for beef is -0.621. This means that, as the price rises 1.0 percent, the quantity demanded falls 0.621 percent. This is fairly inelastic because the quantity doesn't fall as much as the price rose.
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. High oil prices are 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 0.621 percent for every 1.0 percent the price actually rose.
|Month in 2014||Price/lb.||Quantity (in lbs.)|
Although prices rose 28.4 percent, the quantity bought only fell 14.9 percent because demand is fairly inelastic. These quantities assume all other determinants of demand remain the same.
If the determinants of demand other than 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.