What is the Quantity Demanded?

The demand curveDemand CurveDemand Curve is a graphical representation of the relationship between the prices of goods and demand quantity and is usually inversely proportionate. That means higher the price, lower the demand. It determines the law of demand i.e. as the price increases, demand decreases keeping all other things equal.read more describes the relationship between the quantity demanded and the corresponding price of the goods and services. The elasticity of demand describes changes in the quantity levels concerning the price. To drive the demand for goods and services, the seller of the goods and services has to ensure that he quotes a competitive and lucrative price.

The seller should offer several products and services which make the buyer interested and willing to take and buy. There is an inverse relationship between the quantity demanded and the price of goods and services. If there is an increase in demand, there is a decrease in the price of products and services and vice versa.

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Quantity Demanded Formula

The equation can be expressed in terms of price elasticity of demand as the ratio of change in the demand level of prices to the change in price levels.

Price Elasticity on Quantity Demanded = [Pi x (Qj – Qi)] / [Qi x (Pj – Pi)]

Here,

  • Pi and Pj, respectively, represent the Initial and final prices of goods and services.The Initial and final quantity demanded of goods and services are represented by Qi and Qj, respectively.

How to Calculate Quantity Demanded?

Step 1: Firstly, determine the initial levels of demand.

Step 2: Next, Determine the initial price quoted.

Step 3: Next, Determine the final levels of demand.

Step 4: Next, Quote the final price corresponding to the new levels of demand

Step 5: Next, determine the difference between the initial and final demand. Divide the resulting value from the initial quantity

Step 6: Next, determine the difference between the initial price and the final price of demand. Divide the resulting value with the initial price.

Step 7: Next, divide the resulting value from step 5 with step 6 to arrive at the price elasticity of the quantity demanded.

If the resulting value is below 1, we could infer that the quantity demanded by consumers is inelastic. If the resulting value is more than 1, then we could infer that the quantity demanded by the consumer is elastic to the changes in the price levels.

Examples

Example #1

Determine the price elasticity of the quantity in demand. Let us take the example of  20,000 units of apartment demand, and the rental price is quoted at $750. However, for 25,000 units of apartment demand, the rental price is quoted at $650.

Solution

Use the below-given data:

Calculation of Change in Price

  • =$650-$750=$-100

Calculation

  • =$25000-$20000=5000

Calculation of Price Elasticity can be done as follows:

  • =($750500)/(20000-$100)

Price Elasticity on Quantity Demanded will be as follows,

Since the point elasticity of demand is less than 1, we could infer that the quantity demanded is inelastic with the price changesPrice ChangesPrice change in finance is the difference between the initial and final values of an asset, security, or commodity over a particular trading period.read more. Since there has been an enhancement in the inventory of the apartment units, the price has deteriorated as consumers have the option to choose from 25,000 units.

Example #2

Determine the elasticity of the quantity demanded. Let us take the example of petrol and diesel products. There is a percentage increase of 20 percent in demand for petrol and diesel as fuel. Due to demand, the price has appreciated by 30 percent.

  • =20%/30%

Price Elasticity will be as follows,

  • Price Elasticity = 67%

Since the elasticity is below 1, we could infer that the quantity demanded of petrol and diesel products as fuel have an inelastic relationship with the level of prices quoted.

Relevance and Use

The quantity demanded helps the seller determine the right and competitive price that he should quote to the consumer. It enhances the seller’s sales and helps the seller achieve desired levels of growth and income. In short, it helps the seller to formulate a comprehensive pricing policy.

To have a comprehensive pricing policy in place, price elasticity concerning the quantity should be employed. It helps the buyer to produce the right quantity to be sold at the right price, thereby curbing wastage of resources and at the same time catering to the consumer’s demand. It ensures that the seller can maintain and boost its overall levels of profitabilityProfitabilityProfitability refers to a company’s ability to generate revenue and maximize profit above its expenditure and operational costs. It is measured using specific ratios such as gross profit margin, EBITDA, and net profit margin. It aids investors in analyzing the company’s performance.read more.

Additionally, for corresponding levels of quantity demanded, the seller can record the price that he offers to the buyer. He can then plot a demand curve out of the sample so made by the seller. If there is a change in the levels, a similar effect could be seen and illustrated from the demand curve.

Adding to the above point, it is to be noted that the price elasticity is expressed as the slope of the plotted demand curve.

This has been a guide to Quantity Demanded and its definition. Here we learn the formula to calculate quantity demanded in terms of price elasticity along with practical examples and a downloadable excel sheet. You can learn more from the following articles –

  • Supply CurveEconomic Order Quantity CalculationSupply vs DemandUnitary Elastic Demand