Overview
This lecture explains the law of demand, reasons for its downward-sloping curve, demand curve shifts, and the difference between a change in demand and a change in quantity demanded.
The Law of Demand
- The law of demand states there is an inverse relationship between price and quantity demanded.
- When the price decreases, quantity demanded increases, and vice versa.
- A demand schedule shows how quantity demanded changes as price changes.
- Graphing the demand schedule creates a downward-sloping demand curve.
Reasons for the Downward Slope
- The substitution effect: as price falls, people buy more because alternatives seem more expensive.
- The income effect: as price falls, people's purchasing power increases, so they buy more.
- The law of diminishing marginal utility: each additional unit consumed gives less added satisfaction.
Demand Curve Shifters
- Demand curve shifts left for decreased demand and right for increased demand at all prices.
- Five determinants shift demand: taste/preferences, number of consumers, price of related goods, income, and expectations.
- Changes in taste/preferences (e.g., health studies) can increase or decrease demand.
- Increased number of buyers increases demand.
- Substitute goods: higher price for one raises demand for the other; complements: lower price for one raises demand for the other.
- Income shifts demand: normal goods demand rises with income, inferior goods demand falls as income rises.
- Expectations: anticipating higher future prices raises current demand.
Change in Quantity Demanded vs. Change in Demand
- A change in price moves along the same demand curve (change in quantity demanded).
- A change in demand curve is caused by non-price factors (the five shifters).
- Lower price does not increase demand, only quantity demanded.
Key Terms & Definitions
- Law of Demand — price and quantity demanded move in opposite directions.
- Demand Schedule — table showing quantity demanded at each price.
- Demand Curve — graph showing the inverse relationship between price and quantity demanded.
- Substitution Effect — tendency to switch toward cheaper alternatives.
- Income Effect — change in quantity demanded due to change in consumers' purchasing power.
- Law of Diminishing Marginal Utility — each additional unit adds less satisfaction.
- Normal Good — demand rises when income rises.
- Inferior Good — demand falls when income rises.
- Substitute — goods that replace each other in consumption.
- Complement — goods used together.
- Change in Quantity Demanded — movement along the demand curve due to price change.
- Change in Demand — shift of the entire demand curve due to a shifter.
Action Items / Next Steps
- Watch the next lecture on supply, the law of supply, and supply curve shifters.