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Understanding
Demand

Explore the law of demand, demand curves, shifts vs. movements, and the key determinants that drive consumer behavior in the marketplace.

AP Macroeconomics

What Is Demand?

Demand is the quantity of a good or service that consumers are willing and able to purchase at various price levels during a given time period. It is not simply desire: you must have both the willingness and the purchasing power to count as part of market demand.

Quantity Demanded
The specific amount consumers will buy at one particular price point.
Demand Schedule
A table showing the relationship between price and quantity demanded.
Demand Curve
A graph plotting price on the vertical axis vs. quantity on the horizontal axis.

The Law of Demand

Ceteris paribus (all else equal), as the price of a good rises, the quantity demanded falls, and vice versa. This inverse relationship is the most fundamental law in microeconomics and macroeconomics.

Substitution Effect
When a good's price rises, consumers switch to cheaper alternatives.
Income Effect
When a good's price rises, consumers' real purchasing power falls, so they buy less.

The Demand Curve

Quantity (Q) Price (P) $8 $6 $4 $2 20 40 60 D ($8, 30) ($6, 50) ($4, 70)

Reading a Demand Schedule

A demand schedule is the tabular counterpart of the demand curve. Each row shows a specific price and the corresponding quantity demanded, holding all other factors constant.

Price (P) Quantity Demanded (\( Q_d \))
$1010
$830
$650
$470
$290

Movement vs. Shift

Movement Along the Curve
Caused by a change in the good's own price. You slide along the existing demand curve from one point to another. This changes quantity demanded, not demand itself.
Shift of the Curve
Caused by a change in a non-price determinant (income, tastes, etc.). The entire demand curve moves left or right. This changes demand itself.
Quantity (Q) Price (P) D D' Shift Movement

Determinants That Shift Demand

Remember these with the mnemonic TRIBE: five non-price factors that shift the entire demand curve left or right.

T
Tastes and Preferences. If a good becomes trendy, demand shifts right.
R
Related goods. Changes in the price of substitutes or complements shift demand.
I
Income. For normal goods, higher income shifts demand right. For inferior goods, it shifts left.
B
Buyer expectations. If consumers expect prices to rise, current demand shifts right.
E
Number of buyers (Entry). More consumers in the market increases demand.

Normal vs. Inferior Goods

Normal Goods
Demand increases when income rises. Examples: organic food, new cars, vacations. Positive income-demand relationship.
Inferior Goods
Demand decreases when income rises. Examples: instant noodles, public transit, used clothing. Negative income-demand relationship.

Substitutes and Complements

Substitutes Complements
Definition Goods used in place of each other Goods used together
Example Coke and Pepsi Hot dogs and buns
If price of Good A rises... Demand for Good B increases Demand for Good B decreases
Cross-price effect Positive Negative

How to Analyze a Demand Change

1
Identify the event. What changed: the good's own price, or something else (income, tastes, related good)?
2
Classify the change. Own price change = movement along the curve. Non-price factor = shift of the curve.
3
Determine direction. For shifts: does this increase demand (shift right) or decrease demand (shift left)?
4
Draw the graph. Show original curve, new curve or movement, and label the change in \( P \) and \( Q \).
5
State the effect. Specify whether demand changed or quantity demanded changed.

Example 1: Price Change

Scenario: The price of coffee rises from $3 to $5 per cup. What happens?

Quantity (Q) Price (P) D $3 50 A $5 30 B

Example 2: Income Increase

Scenario: Average consumer income rises by 20%. Coffee is a normal good. What happens to the demand for coffee?

Quantity (Q) Price (P)
\(D_1\)
\(D_2\)
 Income ↑

Example 3: Substitute Price Change

Scenario: The price of tea (a substitute for coffee) drops sharply. What happens to demand for coffee?

Quantity (Q) Price (P)
\(D_1\)
\(D_2\)
 Tea cheaper

Individual vs. Market Demand

Market demand is the horizontal summation of all individual demand curves. At each price, add up every consumer's quantity demanded.

Individual Demand
One consumer's willingness and ability to buy at each price level.
Market Demand
Sum of all individual demands: \( Q_{\text{market}} = Q_1 + Q_2 + \ldots + Q_n \) at each price.

Common Mistakes

✕ Confusing Demand with Quantity Demanded
A price change causes a movement along the curve (change in \( Q_d \)), NOT a shift of demand. Only non-price factors shift the curve.
✕ Forgetting Ceteris Paribus
The law of demand holds all else equal. If income or tastes change simultaneously, you must account for the shift, not just the price change.
✕ Reversing Normal and Inferior
When income rises, demand for normal goods shifts right. For inferior goods it shifts left. Many students get this backwards under pressure.

Demand Summary

Event Effect on Graph Term
Own price rises Move up-left along D \( Q_d \) decreases
Own price falls Move down-right along D \( Q_d \) increases
Income rises (normal good) D shifts right Demand increases
Income rises (inferior good) D shifts left Demand decreases
Price of substitute rises D shifts right Demand increases
Price of complement rises D shifts left Demand decreases
More buyers enter market D shifts right Demand increases

Question 1 of 5

If the price of gasoline increases, what happens to the demand for SUVs (a complement to gasoline)?

Question 2 of 5

Which of the following would cause a movement along the demand curve for pizza, rather than a shift?

Question 3 of 5

Instant ramen is an inferior good. If consumer incomes increase significantly, what happens?

Question 4 of 5

The demand curve slopes downward because of which two effects?

Question 5 of 5

A news report predicts that the price of electric vehicles will drop significantly next year. What is the most likely effect on the current demand for electric vehicles?