- Law of demand
- Law of demand
- Market demand as the sum of individual demand
- Substitution and income effects and the law of demand
- Price of related products and demand
- Change in expected future prices and demand
- Changes in income, population, or preferences
- Normal and inferior goods
- Inferior goods clarification
- What factors change demand?
- Lesson summary: Demand and the determinants of demand
- Demand and the law of demand
In this lesson summary review and remind yourself of the key terms, graphs, and calculations used in analyzing the demand for the good. Review the distinction between demand and quantity demanded, the determinants of demand, and how to represent a demand schedule using a graph.
In a competitive market, demand for and supply of a good or service determine the equilibrium price.
The law of demand
Markets have two agents: buyers and sellers. Demand represents the buyers in a market. Demand is a description of all quantities of a good or service that a buyer would be willing to purchase at all prices.
According to the law of demand, this relationship is always negative: the response to an increase in price is a decrease in the quantity demanded.
For example, if the price of scented erasers decreases, buyers will respond to the price decrease by increasing the quantity of scented erasers demanded. A market for a good requires demand and supply.
The determinants of demand
What influences demand besides price? Factors like changes in consumer income also cause the market demand to increase or decrease. For example, if the number of buyers in a market decreases, there will be less quantity demanded at every price, which means demand has decreased.
For instance, if scented erasers are normal goods, then when buyers have more income they will buy more scented erasers at every possible price; this would also shift the demand curve to the right.
|demand||all of the quantities of a good or service that buyers would be willing and able to buy at all possible prices; demand is represented graphically as the entire demand curve.|
|demand schedule||a table describing all of the quantities of a good or service; the demand schedule is the data on price and quantities demanded that can be used to create a demand curve.|
|demand curve||a graph that plots out the demand schedule, which shows the relationship between price and quantity demanded|
|law of demand||all other factors being equal, there is an inverse relationship between a good’s price and the quantity consumers demand; in other words, the law of demand is why the demand curve is downward sloping; when price goes down, people respond by buying a larger quantity.|
|quantity demanded||the specific amount that buyers are willing to purchase at a given price; each point on a demand curve is associated with a specific quantity demanded.|
|change in quantity demanded||a movement along a demand curve caused by a change in price; a change in quantity demanded is a movement along the same curve|
|change in demand||when buyers are willing to buy a different quantity at all possible prices, which is represented graphically by a shift of the entire demand curve; this occurs due to a change in one of the determinants of demand.|
|determinants of demand||changes in conditions that cause the demand curve to shift; the mnemonic TONIE can help you remember the changes that can shift demand (T-tastes, O-other goods, N-number of buyers, I-income, E-expectations)|
|normal good||a good for which demand will increase when buyers’ incomes increase.|
|inferior good||a good for which demand will decrease when buyers’ incomes increase.|
|substitute goods||goods that can replace each other; when the price of a good increases, the demand for its substitute will increase.|
|complement goods||goods that tend to be consumed together; when the price of a good increases the demand for its complement will decrease.|
Key Graphical Model
The demand curve shows all of the quantities that a buyer is willing to purchase at all possible prices. In Figure 1, the curve
represents a buyer that would be willing to purchase nothing when the price is , units when the price is , units with the price is , and units if the price was .
A movement along a curve, such as moving from point
to point occurs when price changes, is a response to an increase in price. In this case, this movement is caused by an increase in price from to .
represents a higher demand for this good, which would happen if a determinant of demand changed. For example, an increase in the number of buyers of this good would cause the increase in demand shown in this graph. A movement from point to point would only occur if demand increased.
Change in demand vs. change in quantity demanded
- A change in demand and a change in quantity demanded are not the same thing. Demand changes only when one of the determinants of demand change (recall the elements of the mnemonic TONIE). For instance, rising consumer incomes (one of the determinants) will increase demand for new cars, a normal good, which would shift the entire demand curve to the right. More cars will be demanded at every price when demand increases.
- Price is not a determinant of demand, thus a change in price does not cause demand to increase or decrease. If the price of new cars changes, ceteris paribus, there will be a change in the quantity demanded and a movement along the demand curve.
How a price change affects quantity demanded for a good and demand for related goods
- A change in the price of a good will cause the quantity demanded for that good to change, but a change in the demand for related goods (complements and substitutes) causes the demand curve to shift.
- For example, when the price of hot dogs falls three things happen: Quantity demanded for hot dogs increases, demand for hot dog buns (a complement) increases, and demand for hamburgers (a substitute) decreases
- How would you describe to a friend the difference between an increase in demand versus an increase in quantity demanded?
- What are the five determinants of demand?
- How would you show a decrease in the demand for Concert Tickets using a graph?
Want to join the conversation?
- What does the (mnemonic TONIE) means ?(10 votes)
- T-tastes and preferences, like whether people like a good more or less (example: at Valentines Day the demand for roses increases as people "like" roses more)
O-other goods, when the prices of other goods change (example: when the price of ice-cream increases, the demand for cake, its complement, changes)
N-number of buyers, when there are more buyers in a market, demand increases
I-income, when income changes, demand changes (Example, if cheese is a normal good, then when the incomes of cheese buyers increase, the demand for cheese increases,
E-expectations, when people expect a price increase in the future, the demand changes today(50 votes)
- Does anyone have any tips or tricks to tell whether or not something changes demand or just the quantity demand?(5 votes)
Are you moving to a new point on the same demand curve? Or is it a response to the change in price? If it is either of these, quantity demanded is changing.
Are you moving to a new demand curve? Is it a response to a change in something besides price? Then it is a change in demand.(29 votes)
- I did not understand the example of hot dogs. can someone give me another example? or (if the price of a cup of black coffee falls what will happen?)(4 votes)
- If the price of a cup of black coffee falls,quantity demand for black coffee increases,demand for complements such as coffee beans increases, and the demand for a substitude such as tea decreases.(5 votes)
- Question 1: Increase in demand means at any given price point, the demand for the good increases. The demand curve shifts to the right. Increase in quantity demanded means the amount of goods purchased based on the price. So, the lower the price the greater the quantity demanded for normal goods and the higher the price, the lower the quantity demanded for normal goods along the same demand curve.
Question 2: The five determinants of demand are T-tastes, O-other goods, N-number of buyers, I-income, E-expectations.
Question 3: A decrease in the demand for Concert Tickets would be represented using a graph where the entire demand curve shifts to the left.(6 votes)
- According to the common misperceptions, price is not a determinant of demand. However, price is one of the five determinants of demand.
Could anyone explain me about this?(4 votes)
- Price of related goods is a determinant of demand, not the price of the good you are buying or selling.(4 votes)
- The Quantity demand shows a shift in the whole curve as to increase in demand relates to the price as opposed to one whole.
Taste, Income, Other goods, Number of buyers, Expectations.
The line is decreasing by shifting to the left.(3 votes)
- how do you formulate the demand equation?(1 vote)
- Micro Approach:
An individual's demand function comes from how much of a good they demand as a function of prices. It is a relationship between the price of the good and the quantity of that good that the consumer is willing to demand. Usually, these take the form of Q^D(P) = a -bP, where a are factors that influence demand besides price (tastes + preferences), b is the slope, and P is the price of the good.
Here is an example: Q^D(P) = 100 - 5P (demand function). You can delve a whole lot deeper into these demand curves, such as deriving them from Cobb-Douglas preferences; however, that is a topic you'll likely learn in Intermediate Micro.
The Aggregate demand curve is the sum of all demand in an economy. It comes from the GDP Identity:
Y = C + G + I +(X-M), where Y represents aggregate demand, C represents consumption, G represents government spending, I represent investment, and (X-M) represents net exports.
Hope this helps, I can add to it if you need me too.(5 votes)
- 1. An increase in demand is described by a shift in the entire demand curve to the right whilst an increase in quantity demanded is described by changing of spots downward on the demand curve.
2. Five determinants of demand are: TONIE: Taste, Other goods, Number of buyers, Income, and Expectation.
3. By shifting the entire demand curve to the left.(3 votes)