Unit 1 · Topic 1.4

Demand

The law of demand says that as a good's price rises, the quantity demanded falls, other things equal, because of the income and substitution effects.

Practice 1: Principles and ModelsPractice 2: InterpretationPractice 4: Graphing and Visuals

Part 1 · Hook

Why this matters

When a smoothie stand drops its price on a hot afternoon, the line gets longer. When a new campus opens next door, the line gets longer too, even at the old price. Both mean more smoothies sold, but economists describe them in completely different words, and the exam scores the difference.

Part 2 · Before you start

What this builds on

Part 3 · Prerequisite check

Quick check before you start

1. A change in the variable on one of a graph's axes causes

  1. a movement along the curve
  2. a shift of the curve
  3. a new axis
  4. a steeper curve
Show the answer

Only a change off the axes shifts a curve.

  • Correct: a movement along the curve:
  • a shift of the curve:
  • a new axis:
  • a steeper curve:

2. A downward-sloping curve shows an

  1. inverse relationship
  2. direct relationship
  3. unrelated pair
  4. upward trend
Show the answer

Downward sloping means one rises as the other falls.

  • Correct: inverse relationship:
  • direct relationship:
  • unrelated pair:
  • upward trend:

Part 4 · See it

See it first

A demand graph for concert tickets: a movement along D1 from J to K when the price falls (a change in quantity demanded), and a shift from D1 to D2 when something else changes (a change in demand).
A lower price moves buyers along D1 (a change in quantity demanded); a change in something else shifts the curve to D2 (a change in demand). LevlPrep original diagram.

Part 5 · Step by step

How it works, step by step

  1. The price of a good fallsbuyers can afford more and the good is cheaper than its substitutes (income and substitution effects)
  2. Buyers respond to the lower pricethe quantity demanded rises: a movement along the demand curve
  3. Something other than the price changes (tastes, income, related prices, expectations, number of buyers)buyers want a different amount at every price
  4. Buyers want more at every pricedemand increases: the whole curve shifts right

Part 6 · Key ideas

Key ideas

  • Law of demand: as a good's price rises, the quantity demanded falls, other things equal, because of the income and substitution effects.
  • A change in the good's own price changes the quantity demanded (a movement along the curve). Anything else changes demand (a shift).
  • Demand shifters: tastes, income (normal goods up, inferior goods down), prices of substitutes and complements, expectations, and the number of buyers.

Part 7 · Misconception

A common mistake

The wrong idea: When the price of a good rises, the demand for it falls.

What actually happens: A higher price lowers the quantity demanded, a movement along the demand curve. Demand itself, the whole curve, shifts only when something other than the good's own price changes.

Part 8 · Check yourself

Check yourself

Exam-style questions. Anything you miss goes into your review queue.

1. Buyers' incomes rise, and pizza is a normal good. Shift the right curve the right way in the market for pizza.

QuantityPriceDSQP

Work on the graph (it needs JavaScript), then check.

Show the answer

For a normal good, higher incomes raise the quantity demanded at every price: demand shifts right.

  • Key: demand shifts right

2. The price of gasoline rises sharply. Shift the right curve the right way in the market for large, fuel-hungry SUVs.

QuantityPriceDSQP

Work on the graph (it needs JavaScript), then check.

Show the answer

Gasoline and SUVs are complements. Dearer gas makes owning an SUV more costly, so fewer SUVs are wanted at every price: demand shifts left.

  • Key: demand shifts left

Data

A smoothie stand's demand schedule

Smoothies buyers want each day at five prices (invented data for practice)
Price per smoothie ($)Quantity demanded per day
2100
380
460
540
620

3. Which law does the table illustrate?

  1. The law of demand: as price rises, demand shifts to the left
  2. The law of demand: as price rises, quantity demanded falls
  3. A direct relationship between price and quantity demanded
  4. A change in demand caused by a change in income
Show the answer

Each $1 rise in price comes with 20 fewer smoothies wanted, along one demand curve: the law of demand.

  • The law of demand: as price rises, demand shifts to the left: A price change moves along the curve; it does not shift demand.
  • Correct: The law of demand: as price rises, quantity demanded falls: Right: price and quantity demanded move in opposite directions.
  • A direct relationship between price and quantity demanded: Price and quantity demanded move in opposite directions: an inverse relationship.
  • A change in demand caused by a change in income: Only the price changes in the table, so the curve itself does not move.

4. Using the table, by how many smoothies a day does the quantity demanded fall when the price rises from $3 to $5?

Type a number. A four-function calculator is allowed, as on the exam.

Show the answer

At $3 buyers want 80 and at $5 they want 40: 80−40=4080 - 40 = 40 fewer smoothies a day.

  • Answer: 40

5. The stand raises its price from $4 to $5. How should you describe what happens?

  1. Quantity demanded falls from 60 to 40, a movement along the demand curve
  2. Demand decreases, so the demand curve shifts left
  3. Demand increases, because the stand earns more per smoothie
  4. Quantity demanded rises, because the price rose
Show the answer

A change in the good's own price changes the quantity demanded, a movement along the curve, not demand itself.

  • Correct: Quantity demanded falls from 60 to 40, a movement along the demand curve: Right: a movement along the curve, from 60 to 40.
  • Demand decreases, so the demand curve shifts left: Demand shifts only when something other than the smoothie price changes.
  • Demand increases, because the stand earns more per smoothie: The stand's earnings do not change how many smoothies buyers want at each price.
  • Quantity demanded rises, because the price rose: The law of demand says quantity demanded falls as price rises.

6. A heat wave arrives, and at every price buyers now want 30 more smoothies a day than the table shows. What happened?

  1. Quantity demanded increased along the same demand curve
  2. Demand decreased: the curve shifted left
  3. The law of demand stopped holding
  4. Demand increased: the whole demand curve shifted right
Show the answer

More wanted at every price, because of the weather, is a change in demand: a shift right.

  • Quantity demanded increased along the same demand curve: A movement along the curve needs a change in the smoothie price.
  • Demand decreased: the curve shifted left: More smoothies are wanted, so demand rose, not fell.
  • The law of demand stopped holding: Price and quantity demanded still move in opposite directions on the new curve.
  • Correct: Demand increased: the whole demand curve shifted right: Right: a non-price change shifts demand right.

7. A student writes, "The price of pizza went up, so the demand for pizza fell." How should the sentence be fixed?

  1. "The quantity demanded of pizza fell"; demand itself did not change
  2. "The demand for pizza rose"; higher prices raise demand
  3. "The supply of pizza fell"; prices affect sellers, not buyers
  4. "Demand fell and quantity demanded rose"; both changed
Show the answer

A change in the good's own price changes the quantity demanded (a movement along the curve). "Demand" means the whole curve.

  • Correct: "The quantity demanded of pizza fell"; demand itself did not change: Right: the price change is a movement along the curve.
  • "The demand for pizza rose"; higher prices raise demand: A price rise lowers the quantity demanded; it does not raise demand.
  • "The supply of pizza fell"; prices affect sellers, not buyers: Buyers respond to the price too; the sentence is about buyers.
  • "Demand fell and quantity demanded rose"; both changed: Quantity demanded falls when price rises, and demand stays put.

Part 9 · Summary

Summary

The law of demand says that as a good's price rises, the quantity demanded falls, other things equal, because of the income and substitution effects. A change in the good's own price moves buyers along the demand curve; a change in tastes, income, the prices of substitutes or complements, expectations or the number of buyers shifts the whole curve. Keep the words straight: quantity demanded for a movement, demand for a shift.

Part 10 · Up next

What comes next

Part 11 · Connections

Connections

Question set for this topic