Topic 1.4 Notes – Demand

1. What Demand Is and What the Demand Curve Shows

Demand is the different quantities of a good or service that consumers are willing and able to buy at various prices over a given time period.

• Willing = they want it.
• Able = they have the purchasing power to pay for it.

Demand is shown with a downward-sloping curve.

A typical demand curve looks like this:

Downward-sloping demand curve

• Price is on the y-axis.
• Quantity demanded is on the x-axis.
• Each point on the curve shows one price-quantity combination.

The Law of Demand

The law of demand says there is an inverse relationship between price and quantity demanded.

• If price increases, quantity demanded decreases.
• If price decreases, quantity demanded increases.

That inverse relationship is why the curve slopes downward from left to right.

Why does it slope down?

Two key reasons:

• Substitution effect
  When a good becomes more expensive, consumers switch to relatively cheaper alternatives.
  Example: If beef prices rise, people buy more chicken.
• Income effect
  When price falls, your purchasing power increases. You can afford more with the same income.
  Lower gas prices leave households with extra money to spend.

This relationship is the foundation of competitive markets. Later, you’ll combine demand with supply to determine equilibrium price and quantity.

2. Demand vs. Quantity Demanded

This is one of the most common AP mistakes. The test loves to hide this in wording.

Quantity Demanded

• A single point on the demand curve
• The amount bought at one specific price
• Changes only when the good’s own price changes
• Shown as a movement along the curve

Look at the demand curve below. Points A, B, and C are all on the same curve.

Movement along a single demand curve (D₀)

Moving from point C to point B is a change in quantity demanded. The curve itself does not move. Only the price changes.

If price rises, you move up the curve.
If price falls, you move down the curve.

Only price changes quantity demanded. Nothing else.

Demand

• The entire curve
• Shows all possible price-quantity combinations
• Changes when a non-price determinant changes
• Shown as a shift of the curve

Right shift = increase in demand
Left shift = decrease in demand

If a question mentions income, population, or prices of related goods, you are dealing with a shift, not a movement.

3. Determinants of Demand

These factors shift the whole curve. Use INSECT.

• I = Income
• N = Number of buyers
• S = Substitutes
• E = Expectations
• C = Complements
• T = Tastes and preferences

A shift means that at every price, quantity demanded changes.

Income

It depends on the type of good:

• Normal good: income ↑ → demand ↑
  Example: During economic expansions, demand for vacations rises.
• Inferior good: income ↑ → demand ↓
  Example: During the Great Depression, many households shifted toward cheaper staple goods because incomes fell.

Know this distinction cold. The AP likes to test inferior goods.

Number of Buyers

• More consumers → demand increases
• Fewer consumers → demand decreases

Population growth, immigration, or new market access all raise demand. Think about housing demand in growing cities.

Substitutes

Goods used in place of one another.

• Price of substitute ↑ → demand for this good ↑
• Price of substitute ↓ → demand for this good ↓

If coffee prices rise, demand for tea increases.

Complements

Goods consumed together. They have joint demand.

• Price of complement ↑ → demand for this good ↓
• Price of complement ↓ → demand for this good ↑

If gas prices increase, demand for SUVs falls.

Expectations

• Expect higher future price → demand now increases
• Expect lower future price → demand now decreases

If people expect home prices to rise next year, they buy now.

Tastes and Preferences

• Positive change (advertising, trends, health info) → demand increases
• Negative publicity → demand decreases

Think about how health awareness increased demand for plant-based foods.