1.5 Demand

What is demand?

Demand is the relationship between the price of a good and the quantity consumers are willing and able to buy at each price, holding other factors constant. The Law of Demand states that as price rises, quantity demanded falls (and vice versa), due to the substitution effect and income effect, creating a downward-sloping demand curve.

Movement vs. shift

A change in price causes a movement along the demand curve (change in quantity demanded), not a shift. A change in a non-price determinant — income, tastes, price of related goods, expectations, or number of buyers — causes the entire curve to shift, changing demand itself at every price.

Shifters of demand

Demand increases (shifts right) when: income rises (for normal goods), price of a substitute rises, price of a complement falls, tastes favor the good, favorable future expectations, or more buyers enter the market. For inferior goods, demand rises when income falls — the opposite relationship.

Key terms

Law of Demand

As price increases, quantity demanded decreases, and vice versa, ceteris paribus.

Normal good

A good whose demand increases as consumer income increases.

Inferior good

A good whose demand increases as consumer income decreases.

Substitute goods

Goods that can replace each other; a price rise in one increases demand for the other (e.g., tea and coffee).

Complementary goods

Goods used together; a price fall in one increases demand for the other (e.g., coffee and cream).

Try an AP-style question

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

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