Micro CHAPTER 2.1:

Demand

CHAPTER SUMMARY

The quantity demanded of a good or service is how much people would buy of something at one price level. For example, if a car is priced at $35,000, people would want to buy 10,000 of them. Demand is the quantity demanded at all different price levels, so it is represented on a graph as a demand curve or a table called a demand schedule. When the price is low, the quantity demanded is high, but as the price rises, the quantity demanded falls, so the demand curve is always downward-sloping. This is known as the law of demand, and can be seen in the chart below (P = Price, Q = Quantity Demanded).

The downward slope of the curve occurs for three reasons:

Substitution Effect: When the price of something goes up, people buy something else instead.
Income Effect: If the price of something goes up, people can't buy as much of it.
Law of Diminishing Marginal Utility: People get less and less utility from buying more of something.

When the price changes, the quantity demanded changes but demand does not. The demand curve can shift, though, due to any of the following factors (known as determinants of demand by the acronym I.N.S.E.C.T.):

Income: If people get more money, demand may increase.
Number of consumers: If there are more people, demand may increase.
Substitutes: If the price of a substitute good (something that you can buy instead) goes up, people may switch to this product, causing demand to increase.
Expectation: If people think the price will rise in the future, they might demand more now.
Complement: If the price of a complement/complementary good (something you buy along with this product) goes down, people may demand more of this product because the overall cost of buying them together went down.
Taste: Changes in people's tastes and preferences can cause demand to go up or down.

When overall demand increases, the curve shifts to the right. When demand decreases, the curve shifts to the left. This can be seen in the charts below. The original curve is labeled as D, but the new curve after the change is labeled as D1.