This section is from the "Elementary Principles of Economics" book, by Richard T. Ely and George Ray Wicker. Also available from Amazon: Elementary Principles Of Economics: Together With A Short Sketch Of Economic History
We have already explained that the study of human wants is directly connected with the study of consumption, and that the study of consumption leads to the study of demand. But we must note that a want for anything is not the same thing as a demand for it. " If wishes were horses, then beggars might ride." In order that there may be a demand for a thing, there must be not only a desire for it, but also the willingness and the ability to offer for it some sacrifice. In other words, to speak in the language of everyday life, we must not simply want the thing, but we must want it enough to pay for it. It must be remembered, therefore, that in economics, demand means desire backed up by means or purchasing power.
But in addition to this definition of the real meaning of the word " demand " in economics, we need a definite way of measuring its intensity. Such a method of measurement is found in the number of units of any commodity which will be purchased at a given price. If a table be constructed of the different quantities of a commodity which would be purchased at different prices, such a table will describe what economists speak of as the state of demand for the commodity. If to-day the people of a certain community are willing to buy 100 bushels of apples at $ 2.00 per bushel, 300 bushels of apples at $1.00 per bushel, 500 bushels of apples at $0.75 per bushel, this list or table, we say, shows the present state of demand for apples in the community. The demand for a commodity is said to increase when the quantity that will be taken at a given price increases.
Let us now consider one by one the conditions which determine in any case whether the demand shall be large or small. The formal statement of these conditions may be regarded as a statement of the laws of demand.
1. The Quantity demanded varies directly with the Marginal Utility. Suppose, in the first place, that the price of a certain quality of tea remains during a certain period at fifty cents the pound, and that during the same period the wealth of the consumers also remains the same. Then it is evident that if the public taste for any reason changes in such a way that the marginal utility of tea becomes less or greater, the demand will fall off or increase to correspond. The importance of this law is especially evident in the case of commodities the demand for which is subject to sudden and violent fluctuations through changes of fashion.
2. The Quantity demanded varies inversely with the Price.Again, suppose that the wealth of consumers remains the same, and that there is no change in the marginal utility of the commodity. Then it is evident that the amount demanded will be greater when the price is low and smaller when the price rises. The relation between price changes and resulting changes in demand varies with different commodities. Thus, in the consumption of wheat, for instance, while it makes a difference in the demand whether the price stands at fifty cents or at a dollar a bushel, the difference is not so great as in the case of articles which satisfy less urgent wants. On the other hand, a fall in the price of certain articles, especially luxuries, is promptly followed by a greatly increased demand. When changes in demand resulting from changes in price are relatively great, the demand is said to be elastic.
3. The Quantity demanded varies directly with the Gen--eral Wealth. In the third place, if we suppose the marginal utility of any commodity and its price to remain the same, it is evident that anything which increases the purchasing power of the community will increase its demand for the commodity. For increase of wealth, as has been explained, lowers the marginal utility of money, and makes it possible to spend more for other commodities without losing that surplus of utility over cost which determines purchases. As is pointed out elsewhere, it is the general wealth of the people of our country, leading to an increased demand for commodities, that offers the special opportunity for abnormal profits to monopolists. The monopoly price or the price at which a monopolist can secure the greatest net returns is regularly higher in the United States than in the countries of Europe.
The whole law of demand, then, may be summed up in a single statement as follows : The quantity demanded varies (1) directly with changes (a) in the marginal utility and (b) in the purchasing power of the community, and (2) inversely with changes in price.
Statistics of Private Consumption. Further light is thrown on the principles which we have been studying by the actual facts regarding the expenditures and consumption of families. A detailed statement of the income and outgo of a family is called a family budget. Careful studies of such budgets have been made in Prussia and Great Britain and in some of our own states, notably Massachusetts and Illinois. On the basis of the Prussian statistics, the table of percentages on the following page has been prepared.
Engel's Law. Prussia
The following table permits a comparison between the conditions obtaining in different countries : Comparative Percentages of Expenditures by the Families of Workingmen in Illinois, Massachusetts, Great Britain, and Prussia
Items of Expenditure
Subsistence . . . Clothing ....
41.38 21.00 17.42 5.63 14.57
49.38 15.95 19.74 4.30 10.73
51.36 18.12 13.48 3.50 13.54
55.00 18.00 12.00 5.00 10.00
49.25 18.27 15.66 4.61 12.21
Total . . .
As a result of his study of Prussian family budgets, Dr. Ernst Engel, an eminent Prussian statistician, laid down the following general laws of consumption, which is sufficiently illustrated in the tables just given : As the income of a family increases,
(1) The percentage of expenditure for food decreases;
(2) The percentage of expenditure for clothing remains approximately the same ;
(3) The percentage of expenditure for rent, fuel, and light is invariable;
(4) The percentage of expenditure for education, health, recreation, etc., increases.
From the figures given in the tables it is evident that demand for food in any community is little elastic, since enough for subsistence is required in any case, and the relative amount demanded by all classes falls off rapidly as these needs are satisfied. On the other hand, increased wealth results in an increasing demand for all the manifold goods and services that minister to culture wants.
Since the satisfaction of man's higher wants is necessary to his complete efficiency as a producer, we can understand from the tables how it is that " the destruction of the poor is their poverty." They live in a vicious circle. The poverty to which they are born is itself the bar to their escape. Once free them from this condition, and the power to perpetuate their own prosperity is given into their hands ; for they thus become more efficient as producers and more skilful in securing a just share in the increased product of their labor.
1.Men seek in their consumption to secure the greatest possible
surplus of utility over cost.
2.The economic importance of a commodity is determined by its marginal utility.
3. The quantity demanded varies directly with the marginal utility of the goods and the wealth of the consumers, and inversely as the price.
4. Increase of fortune usually means an increase of expenditure for the comforts and decencies of life.
1.Draw diagrams roughly representing the initial utility and the
diminishing utility of some different kinds of consumption in your own
2.Which has the greater economic importance for men, water or gold? Water or wheat? Why? Contrast other commodities in the same way.
3.How do we estimate marginal utilities in everyday life ?
4.What would be the relative effect upon demand for automobiles and wheat if the prices of both should fall proportionally? Why has the price of copper remained high in spite of the great increase in its supply ? How does the sudden death of a President affect the demand for mourning goods ? Why ?
5.What percentages of their incomes do different persons in your community spend for the different kinds of things mentioned in Engel's law?
See preceding chapters. Also, on Engel's law:—
Roscher, W.: Principles of Political Economy (Translation), Vol. I,
Ch. I, §§ 1-6. The Seventh Annual Report of the United States Commissioner of
Labor gives the results of other investigations.