Unit 2: Supply and Demand
Definition of Demand
Demand is defined as the different quantities of goods and services that consumers are willing and able to purchase at various price levels.
Demand vs. Quantity Demanded
Quantity demanded is the amount of a good or service that is desired at a particular price level.
Below is a demand curve. Quantity demanded is one point on the curve (i.e. A, B, or C) and Demand is the entire line with all of the points that make it up.
Law of Demand
The law of demand states that the relationship between the price level and the quantity demanded of a good or service is inverse. As the price level rises, consumers are less willing and able to purchase the same quantity, and, therefore, buy less. As the price level falls, consumers are more willing and able to purchase a greater quantity, and, therefore, buy more.
The Law of Demand causes the demand curve to be downward-sloping for 3 reasons:
- Substitution Effect: Whenever the price of a good increases, a consumer will buy less of that good and more of a substitute good (and vice versa).
- Income Effect: Whenever the price of a good increases, consumers have less purchasing power, which means they can buy less of that good with their income (and vice versa).
- Law of Diminishing Marginal Utility: This is what was covered in the last unit! As you consume a good, the additional satisfaction you get from it decreases more and more.
- When price level increases, the quantity of a good demanded decreases.
- When price level decreases, the quantity of a good demanded increases.
Using the graph above, when the price rises from P1 to P2, the quantity demanded decreases from 9 units to 7 units. Also, when the price drops from P3 to P2, the quantity demanded increases from 3 units to 7 units.
💡The only thing that changes the quantity demanded is the price of the good or service.
Determinants of Demand
Determinants are factors that can cause the entire demand curve to increase or decrease. When there is an increase in demand (see graph below), the demand curve will shift right. At every price level, there is an increase in the quantity demanded. When there is a decrease in demand (see graph below), the demand curve will shift left. At every price level, there is a decrease in quantity demanded.
There are several determinants of demand that cause the shift to the right (increase in demand) or the shift to the left (decrease in demand). We are going to use the acronym I-N-S-E-C-T (Income, Number of Consumers, Substitute, Expectation, Complement, Taste) as a way to remember all of the determinants.