Demand and the Demand Curve

• Demand refers to the quantity of a good or service a consumer is both willing and able to purchase at a specific price during a particular time.
• Demand is only effective if the consumer can afford the product.

Demand Curve

• A demand curve visually represents the correlation between price and quantity demanded (QD) by consumers.
• Economists use straight lines instead of actual curves in demand curve representations to simplify analysis.

Law of Demand

• The law of demand states there is an inverse relationship between price and quantity demanded (QD), assuming all other factors remain constant (ceteris paribus).
• An increase in price causes a decrease in quantity demanded.
• A decrease in price causes an increase in quantity demanded.

Individual vs. Market Demand

• Market demand represents the combined individual demands for a product or service.
• Market demand is calculated by summing up individual demands at each price point.

Assumptions Underlying the Law of Demand

• The law of demand is based on the income effect, the substitution effect, and the law of diminishing marginal utility.
• The income and substitution effects illustrate how price changes impact consumers' purchasing power and choices.
• The law of diminishing marginal utility explains why consumers are less willing to pay high prices for additional units of a product.

The Income Effect

• The income effect is the change in a consumer's purchasing power due to a change in the price of a good or service.
• A decrease in price raises purchasing power, enabling consumers to buy more.
• An increase in price reduces purchasing power, limiting the quantity consumers can buy.
• Consumers adjust consumption based on purchasing power changes caused by price fluctuations.

The Substitution Effect

• The substitution effect indicates consumer will replace relatively more expensive goods or services with cheaper alternatives.
• Consumers may seek alternatives providing similar satisfaction at a lower cost when prices rise.

The Law of Diminishing Marginal Utility

• The Law of Diminishing Marginal Utility states that as more units are consumed, the satisfaction from each additional unit decreases.
• Marginal utility refers to the additional satisfaction gained from consuming one more unit of a product.
• The satisfaction from the first unit of consumption is higher than subsequent units.
• Lower prices make it more appealing for consumers to continue purchasing additional units, leading to a movement down the demand curve.

Movements Along a Demand Curve

• When only the price changes (ceteris paribus), there is a change in the quantity demanded (QD).
• This change is represented by a movement along the demand curve.
• An increase in price leads to a contraction in quantity demanded, shown as an upward movement on the curve.
• A decrease in price leads to an extension in quantity demanded, shown as a downward movement on the curve.

Shifts of the Demand Curve

• Numerous factors, known as non-price determinants of demand, can alter the demand for a good or service regardless of price.
• Non-price determinants include changes in real income, tastes/preferences, prices of related goods (substitutes and complements), number of consumers, and future price expectations.
• Changes in non-price determinants cause the entire demand curve to shift.

Non-Price Determinants of Demand Shifts

Changes in Real Income

• Real income influences how many goods/services consumers can afford.
• There is a direct relationship between real income and demand.
  • An increase in income shifts the demand curve to the right (increase in demand).
  • A decrease in income shifts the demand curve to the left (decrease in demand).

Changes in Tastes/Preferences

• Increased preference for a good/service leads to increased demand.
• There is a direct relationship between tastes/preferences and demand; advertising and branding influence tastes.
  • Increased preference shifts the demand curve to the right.
  • Decreased preference shifts the demand curve to the left.

Changes in the Prices of Substitute Goods

• Changes in the price of substitutes influence the demand for a product/service.
• There is a direct relationship between the price of good A and demand for good B.
  • An increase in the price of good A increases the demand for good B, shifting its demand curve to the right.
  • A decrease in the price of good A decreases the demand for good B, shifting its demand curve to the left.

Changes in the Prices of Complementary Goods

• Changes in the price of complementary goods influence the demand for a product/service.
• There is an inverse relationship between the price of good A and demand for good B.
  • An increase in the price of good A decreases the demand for good B, shifting its demand curve to the left.
  • A decrease in the price of good A increases the demand for good B, shifting its demand curve to the right.

Changes in the Number of Consumers

• Changes in population size affect the demand for goods/services.
• There is a direct relationship between population size changes and demand.
  • An increase in population shifts the demand curve to the right.
  • A decrease in population shifts the demand curve to the left.

Future Price Expectations

• Expectations of future price increases cause consumers to buy now, increasing current demand.
• Expectations of future price decreases cause consumers to delay purchases, decreasing current demand.
  • Expectations of rising prices shift the demand curve to the right.
  • Expectations of falling prices shift the demand curve to the left.

Key Takeaway

• A change in price (ceteris paribus) results in a movement along the demand curve, affecting the quantity demanded.
• A change in a non-price determinant causes a shift of the entire demand curve, affecting overall demand.