Demand Curve

• $Demand curve:$ a function that shows the quantity demanded at different prices
• $quantity demanded:$ that quantity that buyers are willing and able to buy at a particular price
• Demand curves tell us the quantity demanded at any price or the maximum willingness to pay(per unit) for any quantity
• Why is the demand curve negatively sloped or why is a greater quantity of oil demanded when the price is low
  • Oil is not equally valuable in all of its uses so the demand curve for oil has a negative slope
  • When the price of oil is high, consumers will choose to use only in its most valuable uses
  • As the price of oil falls, consumers will choose to also use oil in its less and less valued uses
• Demand curve summarizes how millions of consumers choose to use oil given their preferences and the possibilities for substitution
• $“Law of demand”:$ the lower the price, the greater the quantity demanded

What Shifts the Demand Curve

• An increase in demand shifts the demand curve outward, up and to the right
• A decrease in demand shifts the demand curve inward, and down to the left
• Important Demand Shifters
  • Income
  • Population
  • Price of substitutes
  • Price of complements
  • expectations
  • tastes
• Income: when people get richer they buy more stuff
  • Ex: when people get richer they buy bigger cars and bigger cars increases the demand for oil
• $Normal good:$ a good for which demand increases when income increases
  • Ex: cars, electronics
• $Inferior good:$ a good for which the demand decreases when income increases
  • Ex: ramen noodles
• Population: More people, more demand
• Price of substitutes and complements:
  • Natural gas is a substitute for oil in some uses such as heating
  • What happens to the demand for oil when the price of natural gas goes down?
  • Demand for oil will decrease because some people will switch to natural gas instead
  • Demand curve for oil shifts down and to the left
  • Decrease in price of a substitute will decrease demand for other good
  • Increase in price of substitute will increase demand for other good
  • $Complements:$ things that go well together
  • Ex: peanut butter and jelly
  • Demand for a good increases when price of a complementary good decreases
  • Firms want substitutes for their products to be expensive and the complements to be cheap
• Expectations:
  • The expectation of a reduction in the future oil supply increased the demand for oil today
  • Ex: when the weather predicts a big storm, people rush to the store to stock up on storm supplies
• Tastes
  • Changes in tastes caused by fads, fashions, and advertising can all increase or decrease demand