Question

Consider the following two uses of the word demand in news articles: a. An article in the Wall Street Journal noted that an "increase in the price of oil quickly reduces demand for oil." b. A different article in the Wall Street Journal noted, "Electric cars are poised to reduce U.S. gasoline demand by \(5 \%\) over the next two decades." Do you agree with how these two articles use the word demand? Briefly explain.

Short answer

Yes, both articles use the word 'demand' correctly from an economic perspective. The first article follows the 'Law of Demand' - demand decreases as price increases. The second article correctly posits a shift in demand due to an external factor - adoption of new technology (electric cars).

Step-by-step solution

Understanding Demand

In economics, the concept of demand refers to the quantity of a commodity that consumers are willing and able to purchase at various prices over a given period of time. When the price of the commodity increases, and assuming all other factors are constant (Ceteris paribus), the quantity demanded tends to decrease. This concept is known as the 'Law of Demand'. In the first statement: 'increase in the price of oil quickly reduces demand for oil', the scenario aligns with the 'Law of Demand' -- as the price of oil goes up, people want to buy less of it, hence the demand reduces.

Identifying Exceptions

Now coming to the second statement: 'Electric cars are poised to reduce U.S. gasoline demand by \(5 \%\) over the next two decades'. This is suggesting that as the popularity and use of electric cars increases over time (a new technology), the demand for gasoline (a traditional source of energy for cars) will decrease. This is an example of a shift in the demand curve, where demand is being affected by factors other than the price (in this case - a technological change).

Formulating Reply

In response to the question 'Do you agree with how these two articles use the word demand?' Given the correct interpretation and understanding of 'demand' in economic terms - yes, both articles use the term correctly. In the first instance, it follows the conventional 'Law of Demand', and in the second instance, it correctly applies the idea that demand can shift due to factors other than price.

Key concepts

Quantity Demanded

In the world of economics, understanding the concept of quantity demanded is crucial for grasping market dynamics. It refers to the specific amount of a good or service that consumers are ready and able to purchase at a certain price point, during a specified time frame.

When the price drops, the quantity demanded typically increases because consumers perceive it as a better value and may substitute it for other, relatively more expensive goods. Conversely, as the price rises, consumers are likely to buy less, either cutting back on their usage or switching to alternatives. This inverse relationship forms the core of the Law of Demand, where price acts as the primary lever affecting how much of a product is sought after in the market.

But it's not just about the numbers; context matters. For example, suppose the price of a movie ticket decreases. The quantity demanded may increase because more people find it affordable to catch a film on the big screen, leading to more tickets sold.

Shift in Demand Curve

A shift in the demand curve is different from a movement along the demand curve, which we see when there is a change in quantity demanded due to price fluctuations. Rather, a shift in the demand curve signifies a change in demand due to other factors, with the curve moving to the left or right.

What Causes a Demand Curve to Shift?

Several circumstances can lead to this phenomenon: advances in technology, changes in consumer preferences, variations in income levels, or different expectations about future prices. Each of these can either increase demand (shifting the demand curve to the right) or decrease demand (shifting it to the left).

Referring back to our exercise, the rise of electric vehicles is an external factor that's expected to change the whole landscape for gasoline demand, which is why we're discussing a demand curve shift, not just a move along the demand curve.

Price Elasticity

The term price elasticity represents the sensitivity of the quantity demanded to a change in price. It's a measurement economists use to understand how an adjustment in price affects consumer behavior.

If a small price change causes a significant change in the quantity demanded, we say that the product has high price elasticity or that it is 'elastic'. Non-essential and luxury items often fall into this category. On the other hand, inelastic goods, such as essential medications, won't see much change in demand with price hikes.

To calculate the price elasticity of demand, we use the following formula: \[ Elasticity = \frac{\text{Percentage change in quantity demanded}}{\text{Percentage change in price}} \] If the absolute value of elasticity is greater than one, the demand is considered elastic. If it's less than one, it's inelastic. Goods with an elasticity value equal to one are said to have 'unitary elasticity'.

Economic Factors Affecting Demand

In addition to the relationship between price and quantity demanded, economic factors affecting demand are crucial in understanding the bigger picture of consumer behavior and market trends.

Some key factors include:

• Consumer Income: When people have more disposable income, they are more likely to purchase goods and services, thus increasing demand.
• Consumer Preferences: Changes in tastes or preferences can alter demand. For example, if healthy eating becomes a trend, the demand for organic produce might increase.
• Price of Related Goods: The demand for a product can be affected by the price changes of substitutes or complementary goods.
• Expectations: If consumers anticipate a price hike in the future, they may purchase more now, thus increasing current demand.
• Demographics: The composition of the population, such as age and gender, can influence the types of goods and services demanded.
• Economic Policies and World Events: Policies like tariffs or global events like recessions can significantly impact demand.

The exercise we discussed demonstrates how the anticipated increase in electric car use—an economic factor related to technology—will likely diminish gasoline demand over the coming years.