Lesson Overview
Demand describes how much of a good or service consumers are willing and able to purchase at various prices.
In this lesson, you will learn the law of demand, understand how demand curves are constructed, and distinguish between movements along a curve and shifts of the curve.
Learning Objectives
- Define demand in economic terms.
- Explain the law of demand.
- Construct and interpret a demand schedule and demand curve.
- Identify determinants that shift demand.
- Distinguish between a change in quantity demanded and a change in demand.
The Law of Demand
The law of demand states that, all else equal (ceteris paribus), when the price of a good rises, the quantity demanded falls. When the price falls, the quantity demanded rises.
This inverse relationship exists because:
- Substitution effect: Consumers switch to relatively cheaper goods.
- Income effect: A lower price increases purchasing power.
Demand Schedule and Demand Curve
A demand schedule is a table showing quantities demanded at various prices.
A demand curve is a graph of the demand schedule, typically downward sloping.
Price is shown on the vertical axis; quantity is shown on the horizontal axis.
Change in Quantity Demanded vs. Change in Demand
Change in Quantity Demanded
Caused by a change in price. Represented as a movement along the demand curve.
Change in Demand
Caused by factors other than price. Represented as a shift of the entire demand curve.
Determinants of Demand (Shifters)
- Income
- Prices of related goods (substitutes and complements)
- Tastes and preferences
- Expectations
- Number of buyers
Real-World Example
If consumer incomes rise and a product is a normal good, demand increases. The demand curve shifts to the right.
If the price of a substitute falls, demand for the original good decreases.
Practice Questions
- If the price of coffee rises, what happens to quantity demanded?
- If consumer incomes increase, how does that affect demand for normal goods?
- Is a rise in price a shift of the curve or movement along the curve?
What’s Next?
In Lesson 2.2: Supply, we will examine the producer side of the market and analyze how firms decide how much to produce.