Economics

The buyers' demand is represented by a demand schedule, which lists the quantities of a good that buyers are willing to purchase at different prices. An example of a demand schedule for a certain good X is given in Table . Note that as the price of good X increases, the quantity demanded of good X decreases.

This kind of behavior on the part of buyers is in accordance with the law of demand. According to the law of demand, an inverse relationship exists between the price of a good and the quantity demanded of that good. As the price of a good goes up, buyers demand less of that good. This inverse relationship is more readily seen using the graphical device known as the demand curve, which is nothing more than a graph of the demand schedule. A demand curve for the demand schedule given in Table is presented in Figure .

The vertical axis in Figure depicts the price per unit of good X measured in dollars, while the horizontal axis depicts the quantity demanded of good X measured in units of good X. In addition to the demand schedule and the demand curve, the buyers' demand for a good can also be expressed a third way—algebraically, using a demand equation. The demand equation relates the price of the good, denoted by P, to the quantity of the good demanded, denoted by Q. For example, the demand equation for good X corresponding to the demand schedule in Table and the demand curve in Figure is

From the demand equation, you can determine the intercept value where the quantity demanded is zero, as well as the slope of the demand curve. In the example above, the intercept value is 10 and the slope of the demand curve is −2. In order to satisfy the law of demand, the slope of the demand equation must be negative so that there is an inverse relationship between the price and quantity demanded.

Change in the quantity demanded. A change in the quantity demanded is a movement along the demand curve due to a change in the price of the good being demanded. As an example, suppose that in Figure the current market price charged for good X is $4 so that the current quantity demanded of good X is 3 units. If the price of good X increases to $6, the quantity demanded of good X moves along the demand curve to the left, resulting in new quantity demanded of 2 units of good X. The change in the quantity demanded due to the $2 increase in the price of good X is 1 less unit of good X. Similarly, a decrease in the price of good X from $4 to $2 would induce a movement along the demand curve to the right, and the change in the quantity demanded would be 1 more unit of good X.

Change in demand. A change in demand is represented by a shift of the demand curve. As a result of this shift, the quantity demanded at all prices will have changed. Figures (a) and (b) present just two of the many possible ways in which the demand curve for good X might shift. In both figures, the original demand curve is the same as in Figure and is denoted by D _A . In Figure (a), demand curve D _A has shifted to the left to the new demand curve D _B . The leftward shift means that at all possible prices, the demand for good X will be less than before. For example, before the shift, a price of $4 corresponded to a quantity demanded of 3 units of good X. After the shift left, at the same price of $4, the quantity demanded is less, at 1 unit of good X. In Figure (b), demand curve D _A has shifted to the right to the new demand curve D _C . The rightward shift means that at all possible prices, the demand for good X will be greater than before. For example, before the shift, a price of $6 implied a quantity demanded of 2 units of good X. After the shift, at the same price of $6, the quantity demanded is greater, at 4 units of good X.

Reasons for a change in demand. It is important to keep straight the difference between a change in quantity demanded, or a movement along the demand curve, and a change in demand, or shift in the demand curve. There is only one reason for a change in the quantity demanded of good X: a change in the price of good X; however, there are several reasons for a change in demand for good X, including:

1. Changes in the price of related goods: The demand for good X may be changed by increases or decreases in the prices of other, related goods. These related goods are usually divided into two categories called substitutes and complements. A substitute for good X is any good Y that satisfies most of the same needs as good X. For example, if good X is butter, a substitute good Y might be margarine. When two goods X and Y are substitutes, then as the price of the substitute good Y rises, the demand for good X increases and the demand curve for good X shifts to the right, as in Figure (b). Conversely, as the price of the substitute good Y falls, the demand for good X decreases and the demand curve for good X shifts to the left, as in Figure (a). A complement to good X is any good that is consumed in some proportion to good X. For example, if good X is a pair of shoelaces, then a complement good Y might be a pair of shoes. When two goods X and Y are complements, then as the price of the complementary good Y rises, the demand for good X decreases and the demand curve for good X shifts to the left, as in Figure (a). Conversely, as the price of the complementary good Y falls, the demand for good X increases and the demand curve for good X shifts to the right, as in Figure (b).
2. Changes in income: The demand for good X may also be affected by changes in the incomes of buyers. Typically, as incomes rise, the demand for a good will usually increase at all prices and the demand curve will shift to the right, as in Figure (b). Similarly, when incomes fall, the demand for a good will decrease at all prices and the demand curve will shift to the left, as in Figure (a). Goods for which changes in demand vary directly with changes in income are called normal goods. There are some goods, however, for which an increase in income leads to a decrease in demand and a decrease in income leads to an increase in demand. Goods for which changes in demand vary inversely with changes in income are called inferior goods. For example, consider the two goods meat and potatoes. As incomes increase, people demand relatively more meat and relatively fewer potatoes, implying that meat may be regarded as a normal good, and potatoes may be considered an inferior good.

  3.  Changes in preferences: As peoples' preferences for goods and services change over time, the              demand curve for these goods and services will also shift. For example, as the price of gasoline has            risen, automobile buyers have demanded more fuel‐efficient, “economy” cars and fewer gas‐guzzling,          “luxury” cars. This change in preferences could be illustrated by a shift to the right in the demand              curve for economy cars and a shift to the left in the demand curve for luxury cars.

  4.  Changes in expectations: Demand curves may also be shifted by changes in expectations. For                example, if buyers expect that they will have a job for many years to come, they will be more willing          to purchase goods such as cars and homes that require payments over a long period of time, and              therefore, the demand curves for these goods will shift to the right. If buyers fear losing their jobs,            perhaps because of a recessionary economic climate, they will demand fewer goods requiring long‐            term payments and will therefore cause the demand curves for these goods to shift to the left.