Demand Schedule
A demand schedule is a table or list that shows the quantity of a good or service that buyers are willing and able to purchase at each possible price, holding other influences constant. It is one of the most basic tools of microeconomics and, together with the supply schedule, it forms the foundation of the analysis of market equilibrium. The demand schedule embodies the law of demand, the observation that the quantity demanded falls as the price rises, and it is usually represented graphically by a downward-sloping demand curve.
Construction and interpretation
A demand schedule lists prices in one column and the corresponding quantities demanded in another. It represents the plans of buyers at a given time and under given conditions, such as the incomes of consumers, the prices of related goods, and tastes. Because it holds these other influences constant, a movement along the demand schedule reflects only a change in price, whereas a shift of the entire schedule reflects a change in one of the underlying conditions.
The schedule can be constructed for an individual consumer or for the market as a whole. The individual demand schedule reflects one person's willingness and ability to pay, while the market demand schedule is the sum of the quantities demanded by all buyers at each price. Summing requires care because different consumers enter the market at different prices, and the market schedule therefore extends over a wider range of prices than any individual schedule.
The law of demand
The law of demand states that, other things equal, the quantity demanded of a good falls as its price rises, and rises as its price falls. Two effects explain this relationship. The substitution effect arises because a higher price makes the good more expensive relative to substitutes, leading consumers to switch toward those alternatives. The income effect arises because a higher price reduces the real purchasing power of consumers, leading them to buy less of the good and of other goods as well.
There are theoretical exceptions. Goods whose demand rises as income rises can be affected in ways that, for inferior goods, may reinforce the substitution effect, while for Giffen goods the income effect can outweigh the substitution effect, producing an upward-sloping demand schedule. Veblen goods, valued for their exclusivity, may also attract more buyers when their price rises. These cases are rare, and the law of demand holds for the vast majority of goods and services.
Determinants of shifts
Several factors shift the entire demand schedule. Changes in consumer income move the schedule for normal goods in the same direction as the change in income and for inferior goods in the opposite direction. Changes in the prices of related goods shift demand through substitution and complementarity: a rise in the price of a substitute raises demand for the good, while a rise in the price of a complement lowers it. Changes in tastes, preferences, and advertising also shift the schedule.
Expectations of future prices and incomes influence current demand. If buyers expect prices to rise, they may buy now, shifting current demand upward. If they expect their incomes to fall, they may cut spending. The size and composition of the population affect market demand, and government policies such as taxes, subsidies, and regulations can shift demand by altering the effective price or the availability of the good.
Use in analysis
The demand schedule is used to analyse how changes in price and in underlying conditions affect market outcomes. Combined with the supply schedule, it determines the equilibrium price and quantity, where the quantity demanded equals the quantity supplied. Shifts in demand, or in supply, produce predictable changes in the equilibrium, and the framework is used to analyse the effects of taxes, subsidies, price controls, and other policies.
The schedule is also the basis for measuring consumer surplus, the difference between what consumers are willing to pay and what they actually pay. The area under the demand curve above the market price provides a measure of the benefit consumers receive from a market, and this concept is widely used in cost-benefit analysis and in the evaluation of policy. Together with the supply schedule, the demand schedule provides the conceptual scaffolding for much of applied microeconomics.
From schedule to curve and to algebra
The demand schedule is presented in three equivalent ways: as a table, as a curve, and as an equation. A linear demand equation expresses quantity as a constant minus a coefficient multiplied by price, and this algebraic form allows precise calculation of equilibrium, elasticity, and surplus. The convenience of the algebraic form is that it can be manipulated and estimated, and most applied work uses functional forms that fit the data better than a straight line.
The shape of the demand curve matters for the response of quantity to price. A relatively flat curve indicates elastic demand, in which quantity changes proportionately more than price, while a steep curve indicates inelastic demand. The curvature, too, can vary: some goods have demand that is very responsive at high prices and unresponsive at low ones, as people shift to alternatives only when the price becomes high. Estimation of these shapes is the task of empirical demand analysis.
Aggregation and market demand
Market demand is the horizontal sum of individual demand schedules. At each price, the quantities demanded by all buyers are added together. The resulting schedule is more elastic than typical individual schedules, because more buyers can adjust and because buyers can enter and exit the market as the price changes. This aggregation is straightforward in principle but requires information on the distribution of preferences and incomes across consumers.
The composition of demand changes as the price moves, because different consumers have different reservation prices and respond differently. At high prices, only those with strong preferences remain in the market; as the price falls, less enthusiastic buyers enter. This compositional change affects the interpretation of the market demand curve and the measurement of surplus, and it is one reason why estimates of demand responses can vary with the range of prices observed.
Estimation and evidence
Empirical estimation of demand schedules uses observed prices and quantities, together with information on shifts in supply, to identify the demand relationship. Because price and quantity are determined jointly, identifying demand requires instruments or natural experiments that shift supply without shifting demand. Modern work uses scanner data, household surveys, and administrative records, and it estimates elasticities that are central to policy analysis and to the evaluation of market power.
The estimated elasticities vary widely across goods and over time. Necessities tend to have inelastic demand, while luxuries and goods with close substitutes tend to have elastic demand. Demand becomes more elastic over longer horizons, as consumers adjust and as substitutes develop. These regularities are used to predict the effects of taxes, to assess the competitive effects of mergers, and to forecast how markets respond to changes in prices and incomes.