CHAPTER

Demand

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 Chapter Goals
• State the law of demand and distinguish shifts in
demand from movements along a demand curve.
• State the law of supply and distinguish shifts in
supply from movements along a supply curve.
• Explain how the law of demand and the law of
supply interact to bring about equilibrium.
• Discuss the limitations of demand and supply
analysis.

© 2020 McGraw-Hill Education. 2

Demand

Is a schedule or a curve that shows the various amounts of

a product that consumers are willing and able to purchase
at each of series of possible prices during a specific period
of time.

(p. 83)
Price Movie rentals demanded (per week) = Q
A 1 ?
B 2 ?
C 4 ?
D 6 ?
E 8 ?

© 2020 McGraw-Hill Education. 3

 From a Demand Table to a Demand Curve

P Price per
Movie rentals
demanded per
movie week

E A $1.00 9
$8.00

B $2.00 8
$6.00 D Demand
for movies C $4.00 6
$4.00 C
D $6.00 4
$2.00 B
$1.00
A E $8.00 2
Q
2 4 6 8 10

© 2020 McGraw-Hill Education. 4

 The Demand Curve
A demand curve is the graphic representation of the
relationship between price and quantity demanded.

P
Price and quantity
demanded are inversely
related

P1
The demand curve is
downward sloping
P0

As price increases, quantity

Demand demanded decreases
Q
Q1 Q0
© 2020 McGraw-Hill Education. 5
 Demand
The law of demand states that the quantity of a good demanded
is inversely related to the good’s price.
In other words, other things equal (ceteris paribus):
• Quantity demanded rises as price falls.
• Quantity demanded falls as price rises.
As prices change, people change how much they’re willing to
buy.
The law of demand is based on the fact that when prices for a
good rise, people substitute away from that good to other goods.

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Quantity Demanded: Movements Along a Demand Curve

Quantity demanded refers to a specific amount

that will be demanded per unit of time at a
specific price, other things constant.
It refers to a specific point on the demand curve.
A change in price causes a change in quantity
demanded.
A change in price causes a movement along the
demand curve.
© 2020 McGraw-Hill Education. 7
 From a Demand Table to a Demand Curve

P Price per
Movie rentals
demanded per
movie week

E A $1.00 9
$8.00

B $2.00 8
$6.00 D Demand
for movies C $4.00 6
$4.00 C
D $6.00 4
$2.00 B
$1.00
A E $8.00 2
Q
2 4 6 8 10

© 2020 McGraw-Hill Education. 8

 Shifts in Demand versus
Movements Along a Demand Curve

Demand refers to a schedule of quantities of a good that

will be bought per unit of time at various prices, other
things constant.
Refers to the entire demand curve.
Demand tells us how much will be bought at various
prices.
A change in anything other than price that affects the
demand curve changes the entire demand curve.
A change in the entire demand curve is a shift in
demand.
9
 Movement Along a Demand Curve

P
A change in price causes a
movement along the demand curve.
B
$2

$1 A

Demand
Q
100 200
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 Shift in Demand

A change in a shift factor causes

a shift in demand.

B A
$1

Demand0
Demand1
Q
175 200

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 Factors in Demand Shift
Important shift factors of demand include:
1. Income
2. The prices of other goods (related goods)
3. Tastes
4. Expectations
5. Taxes and subsidies
6. Particular factors

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 Application: Demand Shift

What happens to demand for chocolates

P if your income increases?
Demand would shift out to the right
because your income increased.

Demand1
income=120
Demand0
income=100
Q

© 2020 McGraw-Hill Education. 13

 Price Q0 Q1
A 1 9 10
B 2 8 9
C 4 6 7
D 6 4 5
E 8 2 3

Income increases. Income0 =100TL; Income1=120TL

14
1) Effect of Income on Demand:
Normal goods vs. Inferior goods

Normal goods = Goods whose consumption increases when

income increases (and vice versa)
Inferior goods = Goods whose consumption decreases when
income increases (and vice versa)
P P

D1

Q D1 D0 Q D0

Bus rides Taxi rides

15
2) Effect of the price of related goods on Demand:
Substitutes / Complements / Unrelated goods
Substitutes: goods that can be used in place of each other.
Tea/coffee : P tea increases; what happens to tea and coffee
consumption?
Coffee consumption increases, tea consumption decreases;
substituting away from tea towards coffee

P P
P1----- P0-----------
Po----------
D D1
Tea q1 q0Q q0 q1 Coffee QD0
16
Complements: goods that are used together
Car/fuel; CD/CD players
Car prices decrease; ceteris paribus; what is the effect on demand for cars
and gasoline?
Car purchases will increase; gas consumption will increase

P P
D1
P0------ D0
P1------------ p0--------------
q0 q1 q0 q1 Q
Q
Car Gas

17
Revisit of Law of Demand:
Why is it that, all else equal, the higher the price of a good the
smaller is the quantity demanded (and vice versa)?
- Substitution effect = buy more of the cheaper, less of the
expensive good
- Income effect = consider what happens to your real income
or purchasing power
Total effect: Substitution effect + income effect
Price of tea goes up: What happens to tea consumption?
Substitution effect = reduce tea consumption
Income effect=real income falls, you consume less of all
normal goods.
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Income: Nominal vs real income

Nominal income = money income

Real income = purchasing power of this income

Let I=1000TL Let P=P0

I=1000TL P=P1 P1>P0

Nominal income is constant

Real income = reduced!

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Price of tea goes up: Qd of tea?

Qd = falls because of substitution effect

Qd = falls because of income effect (normal good)
---------------------------------------
Total effect = reduction in Qd of tea

P goes up, Qd goes down = negatively sloped D

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 Market Demand: Price per Movie

Price Alice’s
+ Bruce’s + Carmen’s = Market
demand demand demand
(per movie) demand

$2.00 8 5 1 14

$4.00 6 3 0 9

$6.00 4 1 0 5

$8.00 2 0 0 2

© 2020 McGraw-Hill Education. 21

 Market Demand Curve: Movies per Week

The market demand curve is the horizontal

P
summation of all individual demand curves.

$8.00

$6.00

$4.00
Market demand
for movies
$2.00

CARMEN BRUCE ALICE Q

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
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 Individual and Market Demand Curves
For the market, the law of demand is based on two
phenomena:
1. At lower prices, existing demanders buy
more.
2. At lower prices, new demanders enter the
market.

© 2020 McGraw-Hill Education. 23

 Six Things to Remember about
a Demand Curve

1. A demand curve follows the law of demand: When

price rises, quantity demanded falls, and vice versa.
2. The horizontal axis—quantity—has a time dimension.
3. The quality of each unit is the same.
4. The vertical axis—price—assumes all other prices
remain the same.
5. The demand curve assumes everything else is held
constant.
6. Effects of price changes are shown by movements along
the demand curve. Effects of anything else on demand
(shift factors) are shown by shifts of the entire demand
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curve.
Exercise on the Demand Curve

P Qd1 P
60 1
50 3
40 5
30 7 Q
20 9 Slope = -5 = delta P/delta Q

a) Write down the demand function:

Q=…… demand function
P=…….. Inverse demand function

Q= 13 – 1/5P
P= 65 – 5Q
25
b) At what price level would quantity demanded be 0?
P=65

c) Let’s assume a higher income and that this is a

normal good. What will happen to demand?

Increase D shifts to the right

© 2020 McGraw-Hill Education. 26