Overview
This lecture covers the law of demand, the reasons behind the downward-sloping demand curve, the difference between a change in demand and a change in quantity demanded, and the five determinants that can shift demand.
Law of Demand
- The law of demand states there is an inverse relationship between price and quantity demanded.
- As price decreases, quantity demanded increases; as price increases, quantity demanded decreases.
- A demand curve visually represents this relationship and slopes downward.
Reasons for the Law of Demand
- Substitution Effect: Lower prices make a product more attractive compared to substitutes, increasing its quantity demanded.
- Income Effect: Lower prices increase consumers' purchasing power, allowing them to buy more.
- Law of Diminishing Marginal Utility: Each additional unit consumed provides less added satisfaction, so lower prices are needed to increase quantity bought.
Shifts in the Demand Curve
- Changes in price move along the demand curve (change in quantity demanded), not the curve itself.
- Changes in factors other than price shift the entire demand curve right (increase) or left (decrease).
Five Determinants (Shifters) of Demand
- Changes in tastes and preferences (e.g., new studies about health benefits or risks).
- Changes in number of consumers (population increases or decreases).
- Prices of related goods: substitutes (goods that replace each other) and complements (goods used together).
- Changes in income: for normal goods, demand rises with income; for inferior goods, demand falls as income rises.
- Changes in expectations about future prices lead consumers to buy more or less today.
Distinguishing Change in Quantity Demanded vs. Change in Demand
- Change in quantity demanded is caused only by a change in the product's own price (movement along the curve).
- Change in demand results from one of the five shifters (a shift of the curve).
Key Terms & Definitions
- Law of Demand — The inverse relationship between price and quantity demanded.
- Demand Curve — Graph showing how quantity demanded varies with price.
- Substitution Effect — Consumers buy more of a good when its price falls compared to alternatives.
- Income Effect — Lower prices increase purchasing power, allowing consumers to buy more.
- Diminishing Marginal Utility — Additional satisfaction decreases with each extra unit consumed.
- Normal Good — Demand increases when income rises.
- Inferior Good — Demand decreases when income rises.
Action Items / Next Steps
- Watch the next video covering supply, the law of supply, and supply curve shifters.