Overview
This lecture covers the definition of demand in economics, the law of demand, demand curves, and the distinction between movements along the curve and shifts caused by non-price factors.
Definition and Nature of Demand
- Demand is the quantity of a good or service consumers are willing and able to buy at a given price in a given time period.
- For demand to exist in economics, consumers must be both willing and able to purchase.
The Law of Demand
- The law of demand states there is an inverse relationship between price and quantity demanded.
- When price increases, quantity demanded decreases; when price decreases, quantity demanded increases.
- This inverse relationship is illustrated by a downward-sloping demand curve.
Demand Curve and Movements
- The demand curve plots price (y-axis) against quantity demanded (x-axis).
- Movements along the demand curve are caused by changes in the good's own price, assuming ceteris paribus (all other factors unchanged).
- A price increase causes a contraction (decrease) in quantity demanded; a price decrease leads to an extension (increase) in quantity demanded.
Explanations for the Law of Demand
- Income effect: As price rises, purchasing power falls, so consumers buy less.
- Substitution effect: As price rises, substitutes become more attractive, so consumers switch to alternatives.
Shifts in the Demand Curve (Non-Price Factors)
- Non-price factors cause the entire demand curve to shift right (increase) or left (decrease).
- PACIFIC mnemonic for non-price factors:
- Population: More people = higher demand.
- Advertising: Effective ads increase demand; negative ads decrease it.
- Complements' price: Higher price of a complement reduces demand; lower price increases it.
- Income: For normal goods, higher income increases demand; for inferior goods, higher income decreases demand.
- Fashion/Tastes: Positive trends increase demand; negative trends decrease it.
- Interest rates: Lower rates increase demand for financed goods; higher rates decrease it.
- Substitutes' price: Price up for a substitute increases demand for the good, and vice versa.
Key Terms & Definitions
- Demand — The quantity consumers are willing and able to buy at a given price and time.
- Law of Demand — Inverse relationship between price and quantity demanded.
- Ceteris Paribus — All other factors held constant.
- Contraction of Demand — Decrease in quantity demanded from a price increase (movement along curve).
- Extension of Demand — Increase in quantity demanded from a price decrease (movement along curve).
- Normal Good — Demand increases as income rises.
- Inferior Good — Demand decreases as income rises.
- Substitute — A rival good that can be used in place of another.
- Complement — A good bought in conjunction with another.
Action Items / Next Steps
- Memorize the definition of demand and the law of demand.
- Practice drawing and labeling the demand curve, showing movements and shifts.
- Review the PACIFIC mnemonic and examples of each non-price factor.
- Prepare for the next lecture on supply and the supply curve.