ECON 101: Demand vs quantity demanded
Every semester my students read something like this:
A hurricane hits Florida and damages the orange crop. The decrease in the supply of oranges causes orange prices to rise. As prices rise the demand for oranges falls which leads to a decrease in the price of oranges. The final price of oranges may be either higher or lower than before.
And I ask them, True or False? The answer, of course, is False. The statement should read:
A hurricane hits Florida and damages the orange crop. The decrease in the supply of oranges causes orange prices to rise. As prices rise the quantity demanded for oranges falls
which leads to a decrease in the price of oranges. The final price of organges may be either higher or lower than before.
The problem is the first statement above sounds perfectly reasonable if the reader doesn't distinguish between demand and quantity demanded. Confusing quantity demanded with demand (and supply and quantity supplied) will inevitably lead to serious mistakes in the most simple of economic analysis.
For example, consider the gasoline market.
The initial market equilibrium is at point a where the demand (D1) and
supply (S1) curves cross (click on the thumbnail to the right). Suppose that the supply of gasoline falls (S1 to S2). The
supply decrease leads to a new short run equilibrium where D1 and S2
cross at point b.
In the short run, demand (D1) is unchanged yet the quantity demanded (a single point on the demand curve) falls from point a to point b (measured on the horizontal axis).
In the long run, with persistently high prices, people will change more fundamental behavior (e.g., switch away
from SUVs to more fuel efficient cars, move closer to their places of
work, etc), demand becomes more elastic (D1 rotates to D2) and prices fall from point b to point c.
Once we move into the long run, there is now a new short run demand curve slicing through point c (D3). Future changes in the supply of gas will cause movement along D3. If supply increases from S2 to S1 then the price will fall to point d, which is lower than the original price a.
The long run demand, D2, is only a locus of short run equilibria. The demand curve has shifted in response to a change in price over the long run. This sort of thing doesn't happen in a static, short-run analysis. Only in a dynamic analysis can the own-price change lead to a shift of the demand curve.
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