Demand and the Law of Demand

Study Notes

Questions About Demand and the Law of Demand

What factors influence consumer demand for a product?
How does the law of demand explain the relationship between price and quantity demanded?
What is the difference between a change in demand and a change in quantity demanded?
How do shifts in demand affect equilibrium price and quantity in a market?
What are the exceptions to the law of demand?

Understanding Demand

Demand refers to the consumer's desire and ability to purchase a good or service at various price points during a specific period.
It's not just a want, but a willingness to pay and have the means to do so.
Demand is influenced by numerous factors beyond the price itself.

The Law of Demand

The law of demand states that there is an inverse relationship between the price of a good or service and the quantity demanded.
As the price of a good rises, the quantity demanded falls, ceteris paribus (all other factors remaining constant).
This inverse relationship is primarily due to consumer's purchasing power and the substitution effect.
The substitution effect means that consumers are more likely to substitute a more expensive good with a cheaper alternative.
Higher prices reduce the affordability of the good.

Factors that Influence Demand (Other than Price)

Price of related goods:
- Substitute goods are goods that satisfy a similar need (e.g., Coke and Pepsi).
- Complementary goods are goods that are used together (e.g., cars and gasoline).
Consumer income: Higher income generally leads to higher demand for normal goods but potentially lower demand for inferior goods.
Consumer tastes and preferences: Changes in fashion, trends, or consumer preferences shift demand curves.
Consumer expectations: Expectations about future prices or income influence current demand.
Number of buyers in the market: An increase in the number of consumers often leads to a higher market demand.
Seasonality: Demand for certain goods and services is affected by seasonal changes (e.g., summer clothing, winter fuel).

Changes in Demand vs. Changes in Quantity Demanded

A change in demand occurs when a factor other than the good's price influences the quantity demanded at every price. This results in a shift of the entire demand curve.
A change in quantity demanded occurs when the price of the good changes, resulting in movement along the same demand curve.

Demand Curves

A demand curve is a graph that visually represents the relationship between price and quantity demanded.
The curve typically slopes downward from left to right, illustrating the inverse relationship outlined by the law of demand.
The demand curve shifts in response to changes in non-price factors.

Exceptions to the Law of Demand

While the law of demand generally holds, there are exceptions in specific situations. These arise where the demand curve might slope upwards.
Giffen goods are inferior goods for which the quantity demanded increases as the price increases. This unusual effect is often due to the fact these goods are a significant portion of a consumer's budget and become relatively more attractive when their price increases compared to substitute items.
Veblen goods are luxury items, where higher prices are associated with higher demand due to perceived exclusivity or prestige.

Summary

Demand is a consumer's willingness and ability to purchase a good or service.
The law of demand describes the inverse relationship between price and quantity demanded.
Several factors beyond price, such as income, preferences, and expectations, influence demand.
Shifts of the entire demand curve represent changes in demand.
Movements along the curve represent changes in quantity demanded.
Exceptions to the law of demand exist but often represent specific circumstances.

Description

Test your understanding of demand and the law of demand with this quiz. Explore factors influencing consumer demand, the relationship between price and quantity demanded, and the implications for market equilibrium. Challenge yourself with questions about exceptions to the law of demand.