I demand an explanation

This post aims to provide a basic understanding of demand and the relationship between price and quantity demanded. If you’re unfamiliar with economics I recommend that you go back and read a few of my previous posts on the subject of economics in board games.

Demand is the decisions and behavior of buyers in a market. In other words, how buyers act given a set price of a particular good and how they change their behavior when the price of that good changes. The quantity demanded of any good is the amount that buyers are willing and able to purchase. Those of you that have read my previous entries will recall that the willingness is a function of the utility that buyers derive through consuming the good and their ability to purchase a good is limited by their disposable income – i.e. whatever money they have left after paying their bills.

The relationship between the quantity demanded and the price of a good has a fancy title in economics: the law of demand. The law states that, all other things equal, when the price of a good falls – the quantity demanded increases and vice versa. Let’s say that the price of apples suddenly increases by a whopping 100%, from say 1 euro to 2 euros, then buyers will demand fewer apples. Perhaps they buy pears, oranges or other fruits instead. More formally, economists say that the quantity demanded is negatively related to the price of a good. This negative relationship can, and often times is, be presented in a table and graph – see below for my personal demand for apples at different price points.

Since the quantity demanded increases as price decreases their is a downward slope for the line in the diagram.

The above graph and table shows a single individual’s demand for apples, also referred to as individual demand. And quite frankly, whether one person wants apples or not is not really that interesting – what is interesting however, is the market demand for apples. In other words, the collective demand for a good or the sum of the individual demands for a good. But how do we go about determining the collected demand? Simple: we add them up! In the below table and graph I’ve added the demand of another individual (Eve) who isn’t quite as fond of apples as Daniel – about half as willing to pay for apples – and summed them up to form the market demand.

Market demand for apples = Daniel’s demand + Eve’s demand

Now, most actual markets consist of more than two individuals, usually the demand in a market contains the demand of a large amount of individuals and thus a single individual has little to no influence over the market price. If you’re interested in real world markets with few buyers you can read up on monopsony markets.

So how does this concern board games? Well, first off it can be very useful to think about players in terms of buyers in a market. If the game itself has a market, i.e. a group of buyers and sellers of a particular good, then players will likely take on the role of a buyer at some point. It could be something as simple as spending an action to acquire a resource, or something more intricate like a bidding mechanic where players compete through bids to acquire different things in the game.

If players are buyers then they should also exhibit the same characteristics as buyers in a real world market. Players will have preferences between different goods, their consumption will be limited by their wealth, and they will react to a change in the price of a good. Considering players as buyers in a game should therefore also give designers a framework for analysis where you can start asking questions like:

  • How do players respond to a change in the price of a resource?
  • How do they respond to an increase in wealth/income?
  • Do all players exhibit the same preferences between resources in a game?

Getting answers to the above questions can be a great help in identifying problems in your game’s economy. For example, if all players have a strict preference for a certain type of good over the other goods then this could indicate that there is a potential dominant strategy in your game. If players respond in extreme ways to a change in the price of a resource, like suddenly not purchasing it at all, then then this could indicate that the utility of that resource is relatively small and/or potentially situational. Finally, studying how players behave when their income increases and how they spend their additional income will tell you how they value different goods – some goods might only have utility in small quantities. Whether or not this is a problem depends on the rest of your game works, if you’re unsure just say it’s a feature (/s).

That’s it for this post, I’ve decided to describe demand in two separate posts – or rather I started writing just one but it got too long so I split them up. Therefore, I will hold off on going into more detail until we have all the cards on the table after I’ve written about what can trigger a change in demand: see you then!

/Daniel

2 Comments on “I demand an explanation

  1. What do you call it when there is a want for a goods, but buyers are unable to pay the price? (“Price of apples go up, and I really like to have apples – not pears – but now I can only afford 7 instead of 10 apples.”)

    My intuitive name for it is that _demand_ is unchanged, while the volume decreases. But that’s obviously not correct in economics terms. 🙂

    1. Good and highly relevant question yet a bit ahead of the curriculum. Nevertheless: A rise in the market price, as described in your example, generally leads to a loss of consumer welfare as they must now pay more in order to achieve the same level of utility. As to whether or not demand has changed we can’t tell from your example – the market price only changes when there is either a change in demand or supply. So it could be that demand for apples has increased and brought about the increase in market price. I will elaborate on these points in coming posts so don’t worry :).

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