Demand Schedule: Definition and Real Life Example
Definition: 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: 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. That means that, as the price rise 1.0 percent, the quantity demanded fall 0.621 percent. This is fairly inelastic because the quantity doesn't fall as much as the price rose.
(Source: "Price Elasticity Estimates," U.S. Department of Agriculture.)
In 2014, the price of ground beef rose dramatically, thanks to two droughts in a row. The first was in 2012, driving up food prices and forcing 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. For more, see Why Are Food Prices So High? (Source: "Average Food and Energy Prices," Bureau of Labor Statistics.)
For this example, let's say a family of four bought 10 pounds of ground beef in January to make hamburgers, meat loaf 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 will need to be created, to show the new relationship between price and quantity. For more, see Demand Curve Shift.