Demand: Study Guide (Macroeconomics 1.4)

What demand means

In everyday speech, “demand” just means wanting something. In economics it means more than that. Demand is the quantity of a good or service that buyers are willing and able to buy at each possible price, in a given period, with everything else held constant.

Three parts of this definition matter:

• Willing and able. Wanting a car is not demand if you cannot pay for it. Demand needs both the wish and the money.
• At each possible price. Demand is a whole list of price–quantity pairs, not one number.
• Other things held constant. Economists say ceteris paribus (Latin for “other things equal”). We change the price and keep income, tastes and all other influences fixed.

Two terms you must keep apart:

• Quantity demanded: the amount buyers want at one particular price.
• Demand: the whole relationship between price and quantity demanded, shown as a schedule or a curve.

The law of demand

The law of demand says that, other things equal, when the price of a good rises, the quantity demanded falls, and when the price falls, the quantity demanded rises. Price and quantity demanded have an inverse (negative) relationship.

Why does this happen? You only need the direction for this course, but these reasons help you explain it:

• Substitution: when a good becomes more expensive, buyers switch to other goods that now look cheaper by comparison.
• Purchasing power: a higher price means a buyer’s income buys less, so they tend to buy less of the good.
• Extra satisfaction falls: each extra unit usually adds less satisfaction than the one before, so buyers will buy more units only if the price is lower.

Demand schedule and demand curve

A demand schedule is a table of prices and quantities demanded. A demand curve plots the same data on a graph:

• Price goes on the vertical axis.
• Quantity goes on the horizontal axis.
• The curve is labelled D.

Because price and quantity demanded move in opposite directions, the demand curve slopes downward from left to right. Economists still call it a “curve” even when it is drawn as a straight line.

Our fictional market: mango juice in Valdoria

Valdoria is a fictional country. Its currency is the valda (VD). We look at the weekly market for bottles of mango juice in one Valdorian town. The town has two neighbourhoods, North and South. All numbers are fictional.

Price per bottle	North: quantity demanded	South: quantity demanded
VD 2	600	400
VD 3	480	320
VD 4	360	240
VD 5	240	160
VD 6	120	80

Worked example 1: market demand and a movement along the curve

Question. (a) Build the town’s market demand schedule. (b) Show that it obeys the law of demand. (c) The price rises from VD 3 to VD 5. What happens, and how is it shown on the graph?

Step 1: add across at each price. Market demand is the sum of the quantities that all buyers demand at the same price. You add the quantities, not the prices.

Price	North	South	Market quantity demanded
VD 2	600	400	600 + 400 = 1,000
VD 3	480	320	480 + 320 = 800
VD 4	360	240	360 + 240 = 600
VD 5	240	160	240 + 160 = 400
VD 6	120	80	120 + 80 = 200

On a graph this means adding each neighbourhood’s curve sideways (horizontally), at each price.

Step 2: check the law of demand. Each time the price rises by VD 1, the market quantity demanded falls by 200 bottles. Price and quantity demanded move in opposite directions, so the curve slopes downward.

Step 3: the price change. When the price rises from VD 3 to VD 5, the quantity demanded falls from 800 to 400 bottles a week, a fall of 400 bottles.

Interpretation. Only the price of mango juice changed. Buyers’ incomes, tastes and the other influences did not. So the demand curve does not move. Buyers move along the curve from point K to point M in Figure 1. This is a decrease in quantity demanded, not a decrease in demand.

Change in quantity demanded v. change in demand

This is the distinction that costs most marks in this unit.

	Change in quantity demanded	Change in demand
Caused by	A change in the good’s own price	A change in a determinant (anything except the good’s own price)
On the graph	Movement along the existing curve	The whole curve shifts
Words to use	“Quantity demanded rises/falls”	“Demand increases/decreases”

An increase in demand means buyers want more at every price: the curve shifts right. A decrease in demand means they want less at every price: the curve shifts left.

The determinants of demand

Each determinant below shifts the market demand curve. The direction depends on what changes.

• Consumer income.
  • For a normal good, higher income increases demand (shift right). Most goods are normal.
  • For an inferior good, higher income decreases demand (shift left), because buyers switch to goods they prefer. Examples might be the cheapest instant noodles or long-distance bus travel for people who can now afford to fly.
  • Whether a good is normal or inferior depends on how buyers behave, not on its quality.
• Prices of related goods.
  • Substitutes are used in place of each other (mango juice and orange juice). If the price of a substitute rises, demand for this good increases.
  • Complements are used together (printers and ink cartridges). If the price of a complement rises, demand for this good decreases.
• Tastes and preferences. Advertising, fashion or new health information that makes a good more popular increases demand.
• Expectations. If buyers expect the price to rise soon, or (for a normal good) expect their income to rise, demand today increases. If they expect the price to fall soon, they wait, and demand today decreases.
• Number of buyers. More buyers in the market (from population growth or new customers) increase market demand. Fewer buyers decrease it.

Event	Demand for good X	Curve
Income rises, X is normal	Increases	Right
Income rises, X is inferior	Decreases	Left
Price of a substitute for X rises	Increases	Right
Price of a complement of X rises	Decreases	Left
X becomes more fashionable	Increases	Right
Buyers expect X’s price to rise next month	Increases now	Right
Number of buyers falls	Decreases	Left
Price of X itself rises	No change in demand; quantity demanded falls	Movement along

Worked example 2: shifting the demand curve

Question. Start from the town’s market demand in Worked example 1 (call it D₁). Mango juice is a normal good.

(a) Average incomes in the town rise. At every price, buyers now want 200 more bottles a week. Find the new schedule, D₂, and the change at a price of VD 4. (b) Separately, the price of orange juice, a substitute, falls. At every price, buyers now want 200 fewer bottles of mango juice. Find the new schedule, D₃. (c) On D₂, at what price would buyers want only 600 bottles?

Step 1: the new schedules.

Price	D₁ (original)	D₂ (incomes rise)	D₃ (orange juice cheaper)
VD 2	1,000	1,200	800
VD 3	800	1,000	600
VD 4	600	800	400
VD 5	400	600	200
VD 6	200	400	0

(a) At VD 4, the quantity demanded rises from 600 to 800 bottles. The price did not change, so this is an increase in demand: D₁ shifts right to D₂. Mango juice is normal, so higher income raises demand.

(b) Orange juice is now relatively cheaper, so some buyers switch to it. Demand for mango juice decreases: D₁ shifts left to D₃. At VD 4, quantity demanded falls from 600 to 400.

(c) On D₂, buyers want 600 bottles at VD 5. Before the income rise they wanted 600 bottles at VD 4. So after an increase in demand, buyers are willing to pay a higher price for the same quantity. This is another way to read a rightward shift: the curve also lies higher at every quantity.

Check. Each new schedule still obeys the law of demand. Within D₂ or D₃, a higher price still means a lower quantity demanded. Only the position of the curve has changed.

Common misconceptions

• “The price fell, so demand increased.” No. A fall in the good’s own price increases the quantity demanded. It is a movement along the curve.
• “Demand increased, so the curve moves up the line.” An increase in demand moves the whole curve right. It is not a movement along it.
• Adding prices when finding market demand. Add the quantities at the same price. Prices stay as they are.
• “A rise in the price of a substitute decreases demand.” It increases demand for this good, because buyers switch towards it.
• Mixing up substitutes and complements. Ask: are the goods used instead of each other (substitutes) or together (complements)?
• “Higher income always increases demand.” Only for normal goods. For inferior goods, demand decreases.
• “Expecting a higher price later means people buy less now.” They usually buy more now, before the price rises.
• “Demand shifted right, so the price rose.” In this topic you only know that buyers want more at every price. What happens to the market price needs supply as well (Topics 1.5 and 1.6).
• Unlabelled graphs. Always label the axes (Price, Quantity), the curves (D₁, D₂) and use an arrow to show the direction of a shift.

Where this leads

Next you will build the other side of the market in Topic 1.5, Supply, then combine the two curves to find market equilibrium in Topic 1.6. The same “movement along v. shift” idea returns in Unit 3 with aggregate demand. Try the practice questions now, then use the revision notes and the checklist to consolidate.