The relationship between price and quantity demanded — how to read demand schedules and curves, and how to tell a movement along a curve from a shift of the curve itself
"Price is what you pay. Value is what you get."
— Warren BuffettEvery time you decide whether to buy something, you are making a demand decision. You weigh the price against the benefit you expect to receive. Sometimes the price is low enough that the purchase feels easy. Sometimes it is high enough that you walk away. That back-and-forth between price and purchasing decisions — multiplied across millions of buyers in hundreds of markets — is what economists study when they study demand.
Demand is one of the two fundamental forces that determine prices and quantities in markets. In this chapter, you will learn what demand means precisely, how to represent it with schedules and graphs, what causes it to change, and how to distinguish between two things that are easy to confuse: a movement along a demand curve and a shift of the demand curve itself. Mastering this distinction is one of the most important skills in economics.
By the end of this chapter, you will be able to read and draw demand curves, classify the factors that shift demand, explain why the demand curve slopes downward, and apply demand analysis to real markets for goods, services, and resources.
In everyday conversation, people use the word want and the word demand almost interchangeably. In economics, demand means something more specific.
Demand is the relationship between the price of a good or service and the quantity that buyers are willing and able to purchase during a given period, holding all other relevant factors constant.
Three parts of this definition deserve careful attention.
Willing and able. Demand requires both willingness and ability. A person may desperately want a vacation home but lack the income to buy one. That person's wish is not demand in the economic sense. Demand requires that buyers are both willing to make the purchase and possess the financial means to do so. Economists sometimes call this effective demand to emphasize that it must be backed by purchasing power.
During a given period. Demand always refers to a time frame. How many cups of coffee will buyers purchase per day? Per week? Per year? The quantities change depending on the time period, so demand analysis always specifies one.
Holding other factors constant. When economists describe demand as a relationship between price and quantity, they hold other factors fixed. This is the ceteris paribus assumption — a Latin phrase meaning "all else equal." Economists isolate the price-quantity relationship by assuming that income, prices of related goods, tastes, and other factors do not change. When those other factors change, demand itself changes, and that is a different kind of event than a price change.
Demand is not the same as desire or need. People desire many things they will never purchase because the price is too high, their income is too low, or both. Demand is not a fixed number — it is a relationship, a schedule showing what quantities buyers would choose at various prices. Demand is also not the same as quantity demanded, a distinction we return to carefully in Sections 6.6 and 6.7.
The law of demand states that, all else equal, when the price of a good or service rises, the quantity demanded falls; and when the price falls, the quantity demanded rises. Price and quantity demanded move in opposite directions.
This relationship is one of the most reliable and well-supported observations in all of economics. It appears in virtually every market, for virtually every good and service, across every culture and historical period for which we have evidence.
The substitution effect. When the price of a good rises, buyers tend to switch toward alternatives. If the price of chicken rises sharply, some buyers purchase more fish, beans, or eggs instead. The higher price makes the good relatively more expensive compared to substitutes, so buyers substitute away from it. Conversely, when price falls, the good becomes relatively cheaper, and buyers substitute toward it.
The income effect. When the price of a good rises, buyers' purchasing power falls even if their money income stays the same. A higher price means that the same income now buys less. Buyers respond by purchasing smaller quantities of the more expensive good, and often smaller quantities of other goods as well. When price falls, purchasing power effectively rises, and buyers can afford more.
Diminishing marginal benefit. As buyers consume more units of a good, each additional unit typically provides less additional satisfaction than the unit before it. A buyer might be willing to pay a high price for a first unit of something but much less for a fifth or tenth unit. This means that larger quantities will only be demanded at lower prices. We will explore this concept more fully in Chapter 10.
Together, these three explanations give the law of demand its strong and durable character. It is not merely an assumption economists make — it reflects deep regularities in how people respond to scarcity, alternatives, and the purchasing limits imposed by income.
For a small number of goods, the ordinary price-quantity relationship may not hold cleanly. A good whose demand rises with price — perhaps because a higher price signals higher quality — is sometimes called a Veblen good, after the economist Thorstein Veblen. Luxury brands sometimes exhibit this behavior. These cases are unusual and do not overturn the general law. For the vast majority of goods and services, the law of demand holds reliably.
The most direct way to represent demand is through a demand schedule — a table that lists, row by row, the quantity of a good that buyers are willing and able to purchase at each possible price, during a specific time period, holding all other factors constant.
| Price per Orange | Quantity Demanded (oranges per week) |
|---|---|
| $1.00 | 1 |
| $0.80 | 2 |
| $0.60 | 4 |
| $0.40 | 7 |
| $0.20 | 12 |
Table 6.1 — Demand Schedule for Oranges (per week, single buyer)
Reading across any row of a demand schedule tells you a specific fact: at this price, buyers would purchase this quantity. Reading down the table reveals the law of demand in action — as price falls, quantity demanded rises.
Notice that the demand schedule does not tell you the price that actually prevails in the market. It tells you what would happen at each possible price. It is a conditional statement about buyer behavior.
Table 6.1 shows the demand schedule of a single buyer — what one person would purchase at each price. Different buyers have different demand schedules reflecting different incomes, preferences, and access to substitutes.
A demand curve is a graphical representation of a demand schedule. It plots price on the vertical axis and quantity demanded on the horizontal axis, and connects the price-quantity pairs from the demand schedule.
On a standard demand-and-supply graph: the vertical axis measures price; the horizontal axis measures quantity demanded per time period; each point on the curve corresponds to one row of the demand schedule; and the curve itself — often drawn as a straight line for simplicity — shows the entire price-quantity relationship.
The curve slopes downward from left to right. This visual shape captures the law of demand: higher prices are associated with lower quantities demanded, and lower prices are associated with higher quantities demanded.
In practice, the relationship between price and quantity demanded is often curved rather than perfectly straight. For most introductory analysis, economists draw the demand curve as a straight downward-sloping line. This simplification makes graphs easier to draw and read without distorting any of the important economic logic. The straight-line demand curve is a useful model, not a literal claim about the exact shape of every real demand curve.
So far, we have worked with the demand of a single buyer. In most economic analysis, however, we are interested in market demand — the total quantity that all buyers in a market are willing and able to purchase at each possible price.
Market demand is obtained by adding together the quantities demanded by all individual buyers at each price. This process is called horizontal summation because we add up the quantities (measured on the horizontal axis) at each given price.
| Price per Orange | Buyer A | Buyer B | Buyer C | Market Quantity Demanded |
|---|---|---|---|---|
| $1.00 | 1 | 0 | 2 | 3 |
| $0.80 | 2 | 1 | 3 | 6 |
| $0.60 | 4 | 2 | 5 | 11 |
| $0.40 | 7 | 4 | 8 | 19 |
| $0.20 | 12 | 7 | 13 | 32 |
Table 6.2 — Individual and Market Demand Schedules (per week)
The market demand schedule simply sums the individual quantities. The market demand curve, plotted from the rightmost column, slopes downward just as individual demand curves do. The law of demand applies to market demand as well as individual demand.
Because market demand adds together many buyers, the market demand curve is typically flatter (more horizontal) than any individual buyer's demand curve. A small change in price may cause a large change in total quantity demanded across thousands or millions of buyers, even if the change for any single buyer is modest.
A movement along the demand curve occurs when the price of the good changes and, as a result, the quantity demanded changes. The demand curve itself does not move. Buyers simply move to a different point on the same curve.
This kind of change is called a change in quantity demanded. It is always caused by a change in the price of the good itself, and it results in movement along the existing demand curve — either upward (toward a higher price and lower quantity) or downward (toward a lower price and higher quantity).
The price of movie tickets falls from $14 to $10. Buyers respond by purchasing more tickets per month. This is a movement down and to the right along the same demand curve. The demand for movie tickets has not changed — only the quantity demanded has changed in response to the price change.
When price rises → quantity demanded decreases (movement up and to the left along the curve). When price falls → quantity demanded increases (movement down and to the right along the curve). The demand curve stays exactly where it is.
A shift in demand occurs when the entire demand curve moves. At every possible price, buyers now want to purchase a different quantity than before. This is called a change in demand.
When demand increases, the demand curve shifts to the right: buyers want more of the good at every price. When demand decreases, the demand curve shifts to the left: buyers want less of the good at every price.
A rightward shift means demand has increased — at any given price, buyers now demand a higher quantity. A leftward shift means demand has decreased — at any given price, buyers now demand a lower quantity.
Shifts in demand are caused by changes in factors other than the price of the good itself. These factors are sometimes called demand shifters or determinants of demand. The major ones are income, prices of related goods (substitutes and complements), tastes and preferences, buyer expectations, and number of buyers (population). We examine each in the sections that follow.
The single most common error students make in demand analysis is confusing a movement along the demand curve with a shift of the demand curve.
| Event | What Changes | What Happens on the Graph |
|---|---|---|
| Price of the good changes | Quantity demanded | Movement along the curve |
| Any non-price factor changes | Demand itself | Curve shifts left or right |
Two of the most important demand shifters are the prices of substitute goods and complementary goods.
Substitutes are goods that buyers use in place of one another. When the price of one substitute rises, demand for the other substitute increases. Examples of substitute pairs include butter and margarine, coffee and tea, apples and oranges, cable television and streaming services, and gasoline-powered cars and electric vehicles.
The logic: If the price of butter rises sharply, some buyers switch to margarine. Their demand for margarine increases — the demand curve for margarine shifts to the right. The price of butter itself did not change, so this is a shift of the margarine demand curve, not a movement along it. Conversely, if the price of butter falls, some buyers switch back from margarine to butter, and demand for margarine decreases.
When the price of good A rises, demand for good B (the substitute) increases. When the price of good A falls, demand for good B decreases.
Complements are goods that buyers tend to use together. When the price of one complement rises, demand for the other complement decreases. Examples include printers and printer ink, cars and gasoline, smartphones and phone cases, coffee and cream, and tennis rackets and tennis balls.
The logic: If the price of gasoline rises substantially, driving becomes more expensive overall. Buyers may drive less or delay buying a second car. Demand for new automobiles decreases — the automobile demand curve shifts to the left. Gasoline prices changed, but the effect appears as a shift in the demand curve for cars. Conversely, if the price of smartphones falls dramatically, more people purchase smartphones, increasing demand for phone cases, apps, wireless data plans, and other complements.
When the price of good A rises, demand for good B (the complement) decreases. When the price of good A falls, demand for good B increases.
When buyers' incomes change, their purchasing power changes, and so does their demand for goods and services. For most goods, demand increases when income rises and decreases when income falls. These goods are called normal goods — restaurant meals, new clothing, vacations, and electronic devices are examples.
For some goods, demand behaves in the opposite direction: demand decreases when income rises and increases when income falls. These goods are called inferior goods — examples may include instant noodles, low-cost store brands, or bus travel for those who can afford cars as income rises. The word "inferior" is purely technical; it does not mean the good is of poor quality, only that demand moves opposite to income.
Buyers make decisions not only based on current prices and incomes, but also on what they expect to happen in the future. If buyers expect the price of a good to rise significantly next month, many will buy more of it now, before the increase — current demand increases, shifting the curve right today. If buyers expect a recession or a price decline, they may postpone purchases, decreasing current demand.
A news report announces that a drought has damaged orange crops and that orange prices are expected to rise by 40 percent next month. Many buyers rush to purchase oranges now. Current demand for oranges increases — the demand curve shifts right even before the price has changed.
Market demand is the sum of all individual buyers' demands. Therefore, when the number of buyers in a market increases, market demand increases, and when the number of buyers decreases, market demand decreases. Population growth increases demand for housing, food, clothing, transportation, and education. An aging population increases demand for healthcare and retirement housing. Immigration into a region increases demand for local goods and services.
Buyers' tastes and preferences are shaped by culture, advertising, fashion, health information, personal experience, and social norms. When tastes shift toward a good, demand increases. When tastes shift away from a good, demand decreases. Economists generally treat tastes as exogenous — determined outside the economic model — though behavioral economists and marketers study how preferences form and change.
The tools developed in this chapter apply across an enormous range of real markets. A few illustrations show how demand analysis works in practice.
When mortgage interest rates fall, the cost of financing a home purchase decreases, effectively increasing buyers' purchasing power. Demand for homes increases — the demand curve for housing shifts right. Prices and sales volumes tend to rise, all else equal. When a company announces it will relocate thousands of employees to a city, the number of potential buyers in that housing market increases, and demand for local housing rises even before the employees arrive.
Demand for flu vaccinations typically rises every autumn because of seasonal patterns and public health campaigns that shift tastes and awareness. Demand also responds to income: higher-income households are more likely to purchase elective medical procedures, making those procedures normal goods. When health insurance improves and reduces the out-of-pocket price a patient pays for a medical visit, the quantity demanded of healthcare services increases — a movement along the demand curve, since what changed is the effective price the buyer faces.
Bad weather in a growing region can reduce production of a crop, but it can also affect expectations in other regions. If buyers expect a shortage and rising prices for wheat, they may increase current demand — purchasing more wheat or wheat-based products now. This expectation-driven demand increase can amplify price effects. When consumer preferences shift toward organic produce, demand for organic vegetables increases, and conventional vegetable demand may decrease.
The rapid decline in the price of smartphones over two decades increased the quantity demanded of smartphones — a movement along the demand curve. At the same time, falling smartphone prices increased demand for complementary goods: phone cases, mobile apps, wireless data plans, and wireless earbuds — shifts in demand for those goods. Rising incomes in developing economies have increased demand for smartphones, vehicles, air travel, and other goods that are normal goods for households crossing income thresholds.
Reading a demand curve: identify a specific price on the vertical axis; move horizontally across the graph until you reach the demand curve; drop straight down to the horizontal axis to read the quantity demanded at that price. To read the curve in the other direction, identify a quantity, move vertically to the curve, then move left to the price axis.
Identifying a movement versus a shift: ask whether only one point on the original curve moved, or whether the entire curve changed position. Same curve, different point — change in quantity demanded (movement). New curve — change in demand (shift).
Recognizing rightward and leftward shifts: a rightward shift means demand has increased — at every price, buyers want more than before. A leftward shift means demand has decreased — at every price, buyers want less than before.
| Price per Cup | Quantity Demanded (cups/week) |
|---|---|
| $5.00 | 20 |
| $4.00 | 35 |
| $3.00 | 55 |
| $2.00 | 80 |
| $1.00 | 120 |
Use the following demand schedule to answer questions 6 through 10.
| Price per Pound | Quantity Demanded (pounds/week) |
|---|---|
| $3.00 | 200 |
| $2.50 | 280 |
| $2.00 | 380 |
| $1.50 | 510 |
| $1.00 | 680 |
Weekly Demand for Apples (market)
For each scenario, state whether the described change causes (i) a change in quantity demanded or (ii) a change in demand for the indicated good. If demand changes, state whether it increases or decreases and explain the demand shifter responsible.
A government raises the tax on gasoline, increasing the price drivers pay at the pump.
A government expands a free school lunch program, reducing the out-of-pocket cost of lunch for low-income families.
For each item below, identify the error and write a corrected version.
These questions draw on material from Chapters 1 through 5 in addition to Chapter 6.
Chapter 6 examined demand — the buyer side of markets. Chapter 7 turns to supply — the seller side. You will learn what supply means, why supply curves slope upward, what causes supply curves to shift, and how to distinguish a change in quantity supplied from a change in supply. Once you have mastered both demand and supply, Chapter 8 will bring them together to explain how markets determine prices and quantities through equilibrium.
The skills you built in Chapter 6 — reading schedules, drawing curves, classifying shifters, and distinguishing movements from shifts — apply directly to supply analysis. The logic is parallel in many ways, though the underlying economics of producers and sellers differs importantly from the economics of buyers and consumers.