Demand

By the end of this lesson, you will be able to state and apply the law of demand, distinguish movements along the demand curve from shifts of the curve, and identify all demand shifters.

The Law of Demand

All else equal, as price rises, quantity demanded falls; as price falls, quantity demanded rises.

The demand curve slopes downward because:

1. Substitution effect: when a good's price rises, consumers switch to cheaper substitutes
2. Income effect: a price increase reduces real purchasing power — consumers can afford fewer units

The Demand Curve

Each point on the demand curve shows the quantity consumers are willing and able to buy at a given price, holding all other factors constant (ceteris paribus).

Movement along the curve: caused only by a change in the good's own price.

Price ↑ → Quantity demanded ↓ (movement UP the curve — but it's still the same curve)

Shifts of the Demand Curve

Everything else that affects demand (other than the good's own price) causes the entire curve to shift.

Demand shifters (TRIBE):

T — Tastes/preferences: if consumers want more of a good → demand increases (curve shifts right)

R — Related goods prices:

• Substitutes: goods used in place of each other. If substitute's price ↑ → demand for this good ↑ (e.g., Coke price rises → more Pepsi demanded)
• Complements: goods used together. If complement's price ↑ → demand for this good ↓ (e.g., gas price rises → fewer SUVs demanded)

I — Income:

• Normal goods: income ↑ → demand ↑ (cars, restaurants, vacations)
• Inferior goods: income ↑ → demand ↓ (instant ramen, used clothing, bus rides)

B — Buyers (number of): more buyers → higher demand

E — Expectations: expect future price ↑ → buy more now

Elastic vs. Inelastic Demand (Preview)

Price elasticity of demand measures responsiveness:

$$E_D = \frac{% \Delta Q_D}{% \Delta P}$$

• Elastic ($|E_D| > 1$): quantity responds strongly (luxury goods, goods with many substitutes)
• Inelastic ($|E_D| < 1$): quantity responds weakly (necessities, addictive goods, unique goods)