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: $P<em>{sub} \uparrow \Rightarrow D</em>{good} \uparrow$.
  • Complements: $P<em>{comp} \uparrow \Rightarrow D</em>{good} \downarrow$.
• Expected Future Price
  • $E[P<em>{future}] \uparrow \Rightarrow D</em>{today} \uparrow$ (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.