fv1 - demand

AP Microeconomics Study Guide: Unit 2 – Supply and Demand

Topic: 2.1 Demand

What is Demand? (Page 1)

  • Definition of Demand

    • Refers to the desire for a good or service, along with the willingness and ability to pay for it.

    • Represents the buyer's side in the market, influencing prices of goods and services.

The Law of Demand

  • Principle Overview

    • As the price of a good increases, the quantity demanded decreases, and vice versa.

  • Reasons for the Law of Demand

    • Substitution Effect

      • Consumers switch to cheaper substitute goods when the price of a good rises.

      • Example: If chocolate bars become more expensive, consumers may buy mints instead.

    • Income Effect

      • Price changes affect consumers' purchasing power.

      • Higher prices reduce purchasing power, leading to decreased demand for the good.

      • Lower prices increase purchasing power, leading to increased demand.

Graphing Demand (Page 2)

  • Graph Setup

    • Quantity on the x-axis and price on the y-axis.

    • Demand curve is downward sloping, indicating that as price decreases, quantity demanded increases.

Differentiating Demand and Quantity Demanded (Page 3)

  • Demand vs. Quantity Demanded

    • Demand: Overall desire for a good/service at various price levels, represented by the demand curve.

    • Quantity Demanded: Specific amount consumers are willing to buy at a given price, represented as a point on the demand curve.

Shifting Demand (Page 3)

  • Determinants of Demand (I-N-S-E-C-T)

    • Income: Changes in income can increase or decrease demand for goods.

    • Number of Consumers: An increase in consumers can lead to higher demand.

    • Substitutes: Availability of substitutes can decrease demand for the original good.

    • Expectations: Future price expectations can influence current demand.

    • Complements: Demand for complementary goods can affect demand for the original good.

    • Taste: Changes in consumer preferences can increase or decrease demand.

Key Terms to Review (Page 5)

  • Complementary Goods: Goods consumed together; demand for one increases when the price of the other decreases.

  • Demand: Quantity consumers are willing to purchase at various price levels.

  • Income Effect: Change in quantity demanded due to changes in real income from price changes.

  • Law of Diminishing Marginal Utility: Additional satisfaction decreases as more units of a good are consumed.

  • Quantity Demanded: Amount consumers are willing to buy at a specific price during a specific time.

  • Substitution Effect: Consumers opt for cheaper alternatives when the price of a good changes.