Introduction to Demand, Demand Curves, and Demand Determinants

The Law of Demand and Key Terminology

• Law of Demand: States that increasing the price ($P$) of a product lowers the quantity demanded ($QD$) of that same product, while decreasing the price increases quantity demanded.
• Inverse Relationship: The demand curve is downward sloping, demonstrating a negative or inverse correlation between price and quantity demanded.
• Quantity Demanded ($QD$) vs. Demand ($D$):
  • Quantity Demanded ($QD$): Refers specifically to a movement along a fixed demand curve caused solely by a change in the price of the product itself.
  • Demand ($D$): Refers to a shift of the entire curve (left or right) at every price point, caused by non-price factors.

Demand Schedule and Demand Curve Derivation

• Demand Schedule: A numerical data table showing the relationship between price and quantity demanded.
  • Scenario A: Price $= \$2$, $QD = 60,000$
  • Scenario B: Price $= \$4$, $QD = 40,000$
  • Scenario C: Price $= \$6$, $QD = 30,000$
  • Scenario D: Price $= \$8$, $QD = 25,000$
  • Scenario E: Price $= \$10$, $QD = 23,000$
• Demand Curve Visual Graph: Plotted with price ($P$) on the vertical axis and quantity demanded ($QD$) on the horizontal axis.

Five Determinants of Demand (Curve Shifts)

Demand shifts to the right (increase) or to the left (decrease) based on five specific categories of events:

1. Price of Related Products:
   • Substitutes (e.g., Beer vs. Wine, Hot dogs vs. Hamburgers, Coke vs. Pepsi): An increase in the price of a substitute increases demand for the primary product (shifts right from $D_0$ to $D_1$).
   • Complements (e.g., Wine and Cheese, Burgers and Burger Buns, Movies and Popcorn): An increase in the price of a complement decreases demand for the primary product (shifts left from $D_0$ to $D_2$).
2. Price Expectation: Expecting prices to rise in the future causes consumers to buy immediately, increasing current demand.
3. Income:
   • Normal Goods (e.g., Laptops): Higher income leads to an increase in demand (shifts right from $D_1$ to $D_2$).
   • Inferior Goods (e.g., 1994 Honda Civic): Higher income leads to a decrease in demand (shifts left from $D_1$ to $D_2$) as consumers upgrade to better products.
4. Tastes and Preferences: Positive news, health studies, or evolving societal trends increase demand regardless of price.
5. Number of Buyers: Demographics expanding the buyer pool (e.g., an aging population increasing buyers for dietary supplements or wheelchairs) shift demand right.

Practice Scenarios: Gas-Powered BMW Market

• Scenario 1: Price of gas increases:
  • Gas is a complement/input to operating a gas-powered BMW.
  • Result: Demand decreases, shifting the entire curve to the left ($D_0$ to $D_2$).
• Scenario 2: Price of public transit decreases/becomes free:
  • Public transit acts as a substitute for automobile travel in cities like San Francisco, LA County, or Manhattan.
  • Result: Demand for BMWs decreases, shifting the curve to the left ($D_0$ to $D_2$).
• Scenario 3: Car dealerships slash prices from $\$50,000$ to $\$40,000$:
  • Does not fit any of the 5 shift buckets because it is a direct price change of the good itself.
  • Result: Causes a movement along the demand curve from point A ($P_1, QD_1$) to point B ($P_2, QD_2$). Quantity demanded ($QD$) increases, but demand ($D$) remains unchanged.