SAD - Demand Lesson
Demand Lesson
Demand Video
Demand refers to the number of units of a good or service consumers are willing and able to buy in the market at various prices.
View the video below to learn more. To make the video full screen, click the double arrows at the bottom right corner of the object.
Example: The Demand for Gasoline in the City of Atlanta
| Price per Gallon | Quantity Demanded per Week |
| $1.90 |
100,000 |
| $2.00 | 90,000 |
| $2.10 | 80,000 |
| $2.20 | 75,000 |
The Law of Demand states that price and quantity demanded have an inverse (negative or indirect) relationship. This means price and quantity demanded move in opposite directions. As the price of a good rises (or falls), the quantity demanded will fall (or rise), ceteris paribus. Due to this relationship between price and quantity demanded, demand curves will typically be downward sloping (or negatively sloped).
Two Effects that Explain the Law of Demand
- The Substitution Effect of a price change: If the price of gas falls, it becomes relatively cheaper compared to other fuel sources. Consumers will substitute more gas in the place of other fuels. Please note: this is a relative change – gas is not necessarily cheaper than other fuel sources, only relatively cheaper.
- The Income Effect of a price change: If the price of gas falls, the consumer's real income (purchasing power) increases. With a given amount of income, a consumer can now buy more gas. Please note: the actual income of the consumer did not change, only its purchasing power.
Quantity Demanded (QD) – The amount of a good that consumers will buy at a particular price of that good.
Example - At a price of $2.00, the consumers will purchase 90,000 gallons of gas. Because it is a quantity related to a specific price, it is referred to as the quantity demanded at that price.
Change in Quantity Demanded (ΔQD) – This phrase denotes a change in the number of units consumers wish to buy in response to a change in price only. It is shown graphically by a movement along the existing demand curve.
Example - Suppose the price of gasoline increases from $2.00 to $2.10, ceteris paribus (that means there are no changes in other factors, such as the determinants of demand). This increase in price results in a decrease in the quantity demanded from 90,000 to 80,000 gallons (the law of demand is in effect). It is shown by a leftward movement along the demand curve.
Demand Curve for Gasoline
The Determinants of Demand
The determinants of demand include all those other factors, unrelated to the price of a good or service, which influence how much of a good people buy. Below are the basic categories for the determinants of demand:
Change in Consumer Income: For normal goods, income and demand are positively related. That means, as income increases, the demand for the good increases. Of course, the opposite is true also. For inferior goods, income and demand are negatively related. That means, as income increases, the demand for the inferior good will decrease.
Change in Consumer Tastes: This determinant explains how increases and decreases in popularity impact the demand for a good.
Change in the Number of Consumers: As the number of consumers increases, the demand for the good or service they desire increases. The opposite is also true.
Change in the Price of Related Goods: Substitutes are goods and services that can be used in place of one another. A positive relationship exists between the demand for a good and the price of the good's substitute. Complements are goods and services used in conjunction with one another. A negative relationship exists between the demand for a good and the price of the good's complement.
Consumer Expectations: If consumers believe the price will be higher in the future, they will buy more today. If consumers believe the price will be lower in the future, they will buy less today.
Some examples of the determinants of the demand for gas include the number of consumers, the price of related goods like cars, and consumer expectations regarding the price of gas in the future.
Change in Demand (ΔD)
A change in demand occurs because of a change in one of the determinants of demand listed above. It is shown graphically by a shift of the entire demand curve. If demand increases, the original demand curve will be replaced by a demand curve located to the right of the original (the original curve experienced a rightward shift). If demand decreases, the original demand curve will be replaced by a demand curve located to the left of the original (the original curve experienced a leftward shift). It is appropriate to use "right" and "left" to categorize these shifts because demand is measured on the x-axis and numbers get larger as you head to the right on the x-axis and smaller as you head to the left on the x-axis.
Example: Suppose because of an increase in the number of people driving SUVs, there is an increase in the demand for gasoline at all prices that could prevail in the market. The demand schedule is modified to reflect this increase in the demand for gas.
| Price per Gallon | Original QD per week (D) | New QD per week (D1) |
| $1.90 |
100,000 |
110,000 |
| $2.00 | 90,000 | 98,000 |
| $2.10 | 80,000 | 85,000 |
| $2.20 | 75,000 | 78,000 |
Change in Demand for Gasoline
Analyzing the type of change:
- How has the amount people want to buy changed?
- What caused the change in the amount people want to buy?
- How would this be displayed graphically?
Change in Demand vs Quantity Video
View the following video to learn more about change in demand vs. change in quantity demanded. To make the video full screen, click the double arrows at the bottom right corner of the object.
Change in Demand Practice Activity
Click on the answer for each question to test your knowledge.
IMAGES CREATED BY GAVS (Creative Commons License Attribution)