1.5 Demand

The Law of Demand

The law of demand states that as the price of a good rises, the quantity demanded falls, holding all else constant (ceteris paribus) — an inverse relationship. This is shown as a downward-sloping demand curve. A change in price causes movement along the curve, not a shift of the entire curve.

Demand Curve vs. Demand Shifts

A change in quantity demanded results only from a price change of the good itself (movement along the curve). A change in demand is a shift of the entire curve, caused by non-price determinants: income, preferences, prices of related goods (substitutes/complements), number of buyers, and expectations. Rightward shift = increase in demand; leftward = decrease.

Individual vs. Market Demand

Individual demand reflects one consumer's willingness to buy at various prices. Market demand is the horizontal summation of all individual demand curves in a market, showing total quantity demanded at each price by all consumers combined.

Key terms

Law of demand

As price rises, quantity demanded falls, ceteris paribus — an inverse relationship shown by a downward-sloping curve.

Change in quantity demanded

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

Change in demand

A shift of the entire demand curve caused by non-price factors like income, preferences, or related goods' prices.

Substitutes

Goods that can replace each other; a price increase in one raises demand for the other.

Market demand

The horizontal sum of all individual demand curves, showing total quantity demanded at each price.

Try an AP-style question

When the price of coffee rises, the demand for tea (a substitute)…

1. increases
2. becomes zero
3. stays the same
4. decreases