Demand and the Determinants of Demand

Key Concepts

  • Demand represents all the quantities of goods/services that buyers are willing to purchase at all prices.

  • Law of Demand: When price increases, quantity demanded decreases (inverse relationship).

  • Determinants of Demand: Factors that cause demand to shift (not just price).

Distinguishing Demand vs. Quantity Demanded

  • Change in Quantity Demanded → Movement along the demand curve due to price change.

  • Change in Demand → Shift of the entire curve due to factors like income, preferences, or number of buyers.

Determinants of Demand (TONIE Mnemonic)

  • T - Tastes & preferences

  • O - Other goods (substitutes & complements)

  • N - Number of buyers

  • I - Income (normal vs. inferior goods)

  • E - Expectations (future prices, income changes)

Key Terms

  • Demand Schedule: Table showing quantity demanded at different prices.

  • Demand Curve: Graph showing price-quantity relationship.

  • Substitutes: If price of one increases, demand for the other rises (e.g., Coke & Pepsi).

  • Complements: If price of one increases, demand for the other falls (e.g., hot dogs & buns).

Graphical Representation

  • Demand curve shifts right → Increase in demand (e.g., higher income for normal goods).

  • Demand curve shifts left → Decrease in demand (e.g., fewer buyers in the market).

  • Movement along the curve happens only due to price changes.

Common Misconceptions

  • Price is not a determinant of demand; it only affects quantity demanded.

  • Demand shifts due to external factors, not price changes.

  • Example: Lower hot dog prices → More hot dogs bought (quantity demanded) + Higher demand for buns (demand shift).

Discussion Questions

  1. How would you explain the difference between an increase in demand vs. an increase in quantity demanded?

  2. What are the five determinants of demand?

  3. How would you show a decrease in demand for concert tickets on a graph?