Demand

The essentials

Demand is the quantity of a good a consumer is willing and able to buy at different prices during a period. The law of demand says that, other things being equal, quantity demanded falls when price rises and rises when price falls. A demand schedule lists price and quantity; plotting it gives a downward-sloping demand curve.

Market demand is the sum of the quantities demanded by all consumers at each price (horizontal summation of individual demand curves).

Key points

• Determinants of demand: price of the good, prices of related goods, income, tastes and preferences, expectations; for market demand also the number of consumers and income distribution.
• Substitutes (tea and coffee): a rise in the price of one raises demand for the other.
• Complements (car and petrol, pen and ink): a rise in the price of one lowers demand for the other.
• Normal good: demand rises when income rises. Inferior good: demand falls when income rises (for example, coarse grains for some households).
• Movement along the curve (extension or contraction): caused only by a change in the good's own price.
• Shift of the curve (increase or decrease in demand): caused by any other determinant. Rightward shift = increase; leftward shift = decrease.
• Reasons for the law of demand: diminishing marginal utility, substitution effect and income effect.

Exam tips

• First ask: did the good's own price change? If yes, it is a movement; otherwise a shift.
• For market demand from equations, add quantities at the same price, remembering that quantity cannot be negative.

Common mistakes

• Saying "demand increased" when only quantity demanded rose because the price fell.
• Treating every good as normal. A rise in income reduces demand for an inferior good.