Lesson summary: Demand and the

determinants of demand
In a competitive market, demand for and supply of a good or service
determine the equilibrium price.

The law of demand

Markets have two agents: buyers and sellers. Demand represents the buyers
in a market. Demand is a description of all quantities of a good or service that
a buyer would be willing to purchase at all prices.

According to the law of demand, this relationship is always negative: the

response to an increase in price is a decrease in the quantity demanded.

For example, if the price of scented erasers decreases, buyers will respond to
the price decrease by increasing the quantity of scented erasers demanded. A
market for a good requires demand and supply.

The determinants of demand

What influences demand besides price? Factors like changes in consumer
income also cause the market demand to increase or decrease. For example, if
the number of buyers in a market decreases, there will be less quantity
demanded at every price, which means demand has decreased.

For instance, if scented erasers are normal goods, then when buyers have
more income they will buy more scented erasers at every possible price; this
would also shift the demand curve to the right.
Key Terms
Term Definition
all of the quantities of a good or service that buyers would
be willing and able to buy at all possible prices; demand
demand is represented graphically as the entire demand curve.

a table describing all of the quantities of a good or

service; the demand schedule is the data on price and
demand quantities demanded that can be used to create a demand
schedule curve.

a graph that plots out the demand schedule, which shows

demand curve the relationship between price and quantity demanded

all other factors being equal, there is an inverse

relationship between a good’s price and the quantity
consumers demand; in other words, the law of demand is
why the demand curve is downward sloping; when price
law of demand goes down, people respond by buying a larger quantity.

the specific amount that buyers are willing to purchase at

quantity a given price; each point on a demand curve is associated
demanded with a specific quantity demanded.

change in a movement along a demand curve caused by a change in

quantity price; a change in quantity demanded is a movement
demanded along the same curve

when buyers are willing to buy a different quantity at all

change in possible prices, which is represented graphically by a
demand shift of the entire demand curve; this occurs due to a
Term Definition
change in one of the determinants of demand.

changes in conditions that cause the demand curve to

shift; the mnemonic TONIE can help you remember the
determinants of changes that can shift demand (T-tastes, O-other goods,
demand N-number of buyers, I-income, E-expectations)

a good for which demand will increase when buyers’

normal good incomes increase.
a good for which demand will decrease when buyers’
inferior good incomes increase.

goods that can replace each other; when the price of a

good increases, the demand for its substitute will
substitute goods increase.

goods that tend to be consumed together; when the price

complement of a good increases the demand for its complement will
goods decrease.

Key Graphical Model

The demand curve shows all of the quantities that a buyer is willing to
purchase at all possible prices. In Figure 1, the curve D_1D1D, start subscript,
1, end subscript represents a buyer that would be willing to nothing when the
price is \$9$9dollar sign, 9, 222 units when the price is \$7$7dollar sign,
7, 666 units with the price is \$3$3dollar sign, 3, and 999 units if the price
was \$0$0dollar sign, 0.
 A movement along a curve, such as moving from point AAA to
point BBB occurs when price changes, is a response to an increase in price.
In this case, this movement is caused by an increase in price from \$3$3dollar
sign, 3 to \$7$7dollar sign, 7.

The curve D_2D2D, start subscript, 2, end subscript represents a higher

demand for this good, which would happen if a determinant of demand
changed. For example, an increase in the number of buyers of this good
would cause the increase in demand shown in this graph. A movement from
point BBB to point XXX would only occur if demand increased.

Common misperceptions

Change in demand vs. change in quantity

demanded
 A change in demand and a change in quantity demanded are not the same
thing. Demand changes only when one of the determinants of demand change
(recall the elements of the mnemonic TONIE). For instance, rising consumer
incomes (one of the determinants) will increase demand for new cars, a
normal good, which would shift the entire demand curve to the right. More
cars will be demanded at every price when demand increases.

 Price is not a determinant of demand, thus a change in price does not cause
demand to increase or decrease. If the price of new cars changes, ceteris
paribus, there will be a change in the quantity demanded and a movement
along the demand curve.
 How a price change affects quantity demanded for a
good and demand for related goods
 A change in the price of a good will cause the quantity demanded for that
good to change, but a change in the demand for related goods (complements
and substitutes) causes the demand curve to shift.
 For example, when the price of hot dogs falls three things happen: Quantity
demanded for hot dogs increases, demand for hot dog buns (a complement)
increases, and demand for hamburgers (a substitute) decreases

Discussion Questions
 How would you describe to a friend the difference between an increase in
demand versus an increase in quantity demanded?
 What are the five determinants of demand?
 How would you show a decrease in the demand for Concert Tickets using a
graph?