Demand & Demand Shifters

Demand: Definition

  • Demand = relationship between price (P) of a good/service and quantity demanded (Q_d), ceteris paribus (all else held constant).
  • Independent of supply; they only interact at market equilibrium.

Quantity Demanded: 3 Conditions

  • Consumers want the quantity at P.
  • Consumers can afford the quantity at P.
  • Consumers would buy the quantity if offered at P.

Law of Demand

  • Demand curve is downward-sloping: P \uparrow \Rightarrow Q_d \downarrow (and vice-versa).
  • Mathematically: \frac{\partial Q_d}{\partial P} < 0.

Demand Curve vs. Movement

  • Price change only → movement along an existing curve.
  • Any other factor change → curve shifts:
    • Right shift = demand increases (higher Q_d at every P).
    • Left shift = demand decreases (lower Q_d at every P).

Common Demand Shifters

  • Consumers’ Income
    • Normal goods: income \uparrow \Rightarrow demand \uparrow.
    • Inferior goods: income \uparrow \Rightarrow demand \downarrow.
  • Prices of Related Goods
    • Substitutes: P{sub} \uparrow \Rightarrow D{good} \uparrow.
    • Complements: P{comp} \uparrow \Rightarrow D{good} \downarrow.
  • Expected Future Price
    • E[P{future}] \uparrow \Rightarrow D{today} \uparrow (and opposite for expected fall).
  • Financial Market Conditions
    • Easier/cheaper credit (interest rates \downarrow) ⇒ demand \uparrow; tighter credit ⇒ demand \downarrow.
  • Preferences, Information, Advertising, Quality
    • Positive perception ⇒ right shift; negative ⇒ left shift.

Illustrative Example (Mimosa Exercise)

  • Collected class willingness-to-pay at various P; plotted points to form a demand curve.
  • Showed distribution of valuations and confirmed downward slope.

Key Takeaways

  • Demand is a relationship, not a single number.
  • Keep demand and supply conceptually separate until analysing equilibrium.
  • Linear demand curves are used in class for simplicity; real curves need not be linear.