Short on time? This page is the recap. For explanations, graphs and worked examples, use the full study guide.
Recap
- Markets work well only with clear property rights: buyers must be sure that what they pay for becomes theirs.
- Buyers respond to incentives (above all, price) and face constraints (income, time, laws and regulations).
- Demand = the quantities buyers are willing and able to buy at each price in a period, other things equal.
- Law of demand: own price up → quantity demanded down (and the reverse). The demand curve slopes downward.
- Why it slopes down: the substitution effect, the income effect and diminishing marginal utility.
- The demand curve is a marginal benefit curve: its height at a quantity is the MB of the last unit bought.
Key relationships
| Relationship | How to use it |
|---|---|
| Buy each unit while MB ≥ price | Builds an individual demand schedule from MB values |
| Market Qd at price P = sum of every buyer’s Qd at P | Add across each row; on a graph, add horizontally |
| Own price change | Movement along D: “quantity demanded rises/falls” |
| Determinant change | Shift of D: “demand increases (right) / decreases (left)” |
| Determinant | Change | Effect on demand |
|---|---|---|
| Income, normal good | rises | increases (right) |
| Income, inferior good | rises | decreases (left) |
| Price of a substitute | falls | decreases (left) |
| Price of a complement | falls | increases (right) |
| Tastes and preferences | in favour of the good | increases (right) |
| Expected future price | rises | increases now (right) |
| Number of buyers | rises | increases (right) |
Assumptions
- Other things equal (ceteris paribus): only the variable being studied changes.
- Demand is measured over a stated period (per week, per year).
- Price is on the vertical axis; quantity on the horizontal axis.
Mistakes to avoid
- Saying “demand rises” when only the good’s own price fell. Say “quantity demanded rises”.
- Getting substitutes backwards: a cheaper substitute reduces demand.
- Assuming all goods are normal. Check the context for inferior goods.
- Averaging individual demands instead of adding them.
- Unlabelled graphs: label both axes (price with units, quantity with units and period) and the curves (D₁, D₂).
- Drawing a shift as a movement along the old curve, or the other way round.
Quick self-check
- Two buyers demand 5 and 4 units at $2, 3 and 2 units at $4, 1 and 0 units at $6. What is market quantity demanded at each price? (9, 5 and 1 units)
- The price of printer ink rises. What happens to the demand for printers? (It decreases: ink is a complement. Shift left.)
- Why does a lower price raise quantity demanded through the income effect? (The same income buys more, so purchasing power rises.)
- A law raises the minimum age for buying a product. Shift or movement? (Shift left: fewer buyers can legally buy.)
Next: practice questions.