The Most Famous Curve in Economics
Demand is the relationship between a good's price and the quantity buyers are willing and able to purchase, holding everything else constant. Wanting a yacht is not demand without purchasing power.
The law of demand: when price rises, quantity demanded falls.
Plotted with price on the vertical axis, demand slopes downward.
| Force | Mechanism | Example |
|---|---|---|
| Substitution effect | Pricier good switch to alternatives | Coffee up, tea instead |
| Income effect | Higher price shrinks real purchasing power | Buy less of everything |
The market demand curve is the horizontal sum of every individual buyer's curve at each price.
Common pitfall: Saying "demand fell" when the price rose. A price change moves you along the curve. Reserve "demand fell" for a leftward shift of the whole curve.
Movement vs Shift
Confusing movements and shifts is the ultimate exam trap.
- Movement along the curve: Caused by one thing only: the good's own price. Price falls, you slide down the same curve.
- Shift of the whole curve: Caused by anything else that changes how much buyers want at every price.
| Change in... | What happens to demand |
|---|---|
| The good's own price | Movement along the curve |
| Income (normal) | Shifts right when income rises |
| Income (inferior) | Shifts left when income rises |
| Substitute price | Substitute pricier shifts right |
| Complement price | Complement cheaper shifts right |
| Tastes / expectations | Shifts in either direction |
Tip: Ask what changed? Own price along the curve. Anything else the whole curve moves.