The basics: Demand relates to buyers/consumers. We model it with price (P) and quantity demanded (Q_d).
The Law of Demand: there is an inverse relationship between price and quantity demanded. When price falls, quantity demanded rises; when price rises, quantity demanded falls.
Demand schedule and demand curve
A demand schedule lists price-quantity pairs showing the inverse relationship: as price goes down, quantity demanded goes up.
When you plot the schedule, you get a downward-sloping demand curve (the law of demand).
Why the demand curve is downward sloping (three explanations):
1) Substitution effect: if the price of milk falls, it becomes relatively cheaper than substitutes (e.g., juice), so consumers substitute toward milk; conversely, if milk price rises, demand for milk falls as substitutes are relatively cheaper.
Example concept: consumers switch to milk from relatively more expensive substitutes when milk gets cheaper.
2) Income effect: a lower price increases purchasing power, so consumers can buy more milk; a higher price reduces purchasing power, so they buy less milk.
Example concept: on sale milk (lower price) lets you buy more gallons with the same income.
3) Law of diminishing marginal utility: satisfaction (utility) from each additional unit decreases with each extra unit consumed.
Applies to sipping milk or buying gallons: the first gallon provides high satisfaction, subsequent gallons provide less additional satisfaction.
A change in price moves along the demand curve (quantity demanded changes, demand itself does not shift).
A non-price factor changing (one of the five shifters) shifts the entire demand curve left or right, changing demand at every price.
Demand shifts (five shifters/determinants)
Taste and preferences: e.g., new study finding milk improves school performance would shift demand to the right (higher demand at every price).
Number of consumers: more buyers → higher demand (curve shifts right).
Price of related goods (substitutes and complements):
Substitutes (e.g., almond milk) – if the price of almond milk rises, demand for cow’s milk increases (shift right); if almond milk price falls, demand for cow’s milk falls (shift left).
Complements (e.g., cereal) – a fall in the price of cereal increases demand for milk (shift right).
Income: depends on the type of good.
Normal goods: higher income → higher demand; lower income → lower demand.
Inferior goods: higher income → lower demand; lower income → higher demand.
Expectations: if you expect milk prices to fall next week, you buy less today (demand falls); if you expect prices to rise, you buy more today (demand rises).
Change in quantity demanded vs change in demand (illustrative distinction)
On a graph with points A, B, C on the demand curve:
Movement from A to B along the same demand curve (price changes) = change in quantity demanded.
Example: price from P1 to P2, Q_d changes from a to b.
Movement from A to C (price unchanged at A, but the quantity demanded changes due to shifters) = change in demand.
Quick check: what happens to demand when price goes down?
The price change moves along the demand curve, affecting quantity demanded, not demand itself.
In this lecture’s example, the direct answer given was that demand (the curve) does not change due to price alone; only the quantity demanded changes along the curve.
Transition: lead-in to supply
The next topic uses milk to explain supply and the law of supply (up next).
Supply
The Law of Supply: there is a direct relationship between price and the quantity supplied. Higher prices incentivize producers to produce more.
The supply curve
The supply curve is upward sloping: as price increases, quantity supplied increases.
Price change vs shift of the supply curve
A change in price moves along the supply curve (quantity supplied changes).
A non-price determinant changing (one of the five shifters) shifts the entire supply curve left or right.
Supply shifts (five shifters/determinants)
Price of inputs/resources: e.g., if the price of dairy cows rises, the cost of producing milk rises, so supply falls (curve shifts left).
Number of producers: more producers increase supply (curve shifts right).
Technology: better or more productive technology increases supply (curve shifts right).
Government involvement: subsidies encourage production (shift right); taxes discourage production (shift left).
Future expectations: if producers expect higher profits in the future, they may hold back current supply (short-run decrease today) and increase later (shift right in the future).
Quick reminder: effect of price on supply
When the price increases, quantity supplied increases (movement along the supply curve).
The supply curve itself does not shift due to price changes alone.
The corresponding price is the market-clearing price, and the corresponding quantity is the market-clearing quantity: P^, Q^.
In the milk example, the equilibrium price is stated as P^* = 3 with equilibrium quantity Q^* = 10 (at that price, the quantity demanded equals the quantity supplied).
Disequilibrium outcomes when price is not at equilibrium
Surplus (excess supply): when price is above equilibrium, quantity supplied exceeds quantity demanded.
Example given: at price P = 5, Qd = 10 and Qs = 50, so the surplus is Surplus = Qs - Qd = 50 - 10 = 40 gallons.
Typically, producers lower the price to clear the surplus and move toward equilibrium.
Shortage (excess demand): when price is below equilibrium, quantity demanded exceeds quantity supplied.
Example given: at price P = 1, Qd = 80 and Qs = 10, so the shortage is Shortage = Qd - Qs = 80 - 10 = 70 gallons.
In a shortage, price tends to rise as consumers bid up the price and producers respond by increasing supply.
Market adjustment and expectations
In the absence of other policy actions, surpluses tend to be eliminated through price adjustments; shortages tend to be eliminated as prices rise toward equilibrium.
Connection to the next video
The following video promises to explain how demand and supply curves shift (not just move along) and how those shifts alter equilibrium price and quantity.
Summary of Key Concepts and Formulas
Demand concepts
Law of Demand: P ext{ and } Q_d ext{ are inversely related}
Demand curve: downward sloping
Substitution effect: cheaper relative substitutes draw buyers away from more expensive goods
Income effect: price changes alter purchasing power; higher purchasing power increases demand
Diminishing marginal utility: each additional unit provides less added satisfaction
Determinants of demand (five shifters):
Taste and preferences: shift right if tastes improve; left if tastes worsen
Number of consumers: more buyers shift right
Prices of related goods (substitutes/complements): e.g., almond milk substitutes, cereal complements
Income (normal vs inferior goods): normal vs inferior behavior definitions
Expectations about future prices
Change vs shift in demand
Change in quantity demanded: movement along the demand curve due to a price change
Change in demand: shift of the entire demand curve due to non-price determinants
Supply concepts
Law of Supply: P ext{ and } Q_s ext{ are directly related}
Supply curve: upward sloping
Determinants of supply (five shifters):
Price of inputs/resources (e.g., dairy cows)
Number of producers
Technology/productivity improvements
Government actions (subsidies increase supply; taxes decrease supply)