Welcome to the World of Demand!

Hey everyone! Get ready to dive into one of the most important ideas in all of Economics: the Law of Demand. Don't worry if the name sounds a bit serious. It's actually a super simple idea that you already use every single day, probably without even thinking about it!

In this chapter, we'll figure out why we buy more of something when it's on sale, and how our choices are affected by things like our income, the weather, and the price of other products. Understanding demand is like having a superpower that helps you understand how the world of buying and selling works. Let's get started!


Section 1: The Law of Demand - The Basic Rule

What is Demand?

In economics, demand isn't just about wanting something. It's about being both willing AND able to buy it at a certain price.

Analogy Time: You might be willing to buy a brand new Ferrari (you want it!), but are you able to pay for it? For most of us, the answer is no. Therefore, you don't 'demand' a Ferrari in the economic sense. However, if you are at a cafe, you are probably both willing and able to buy a cup of coffee. That's real economic demand!

Stating the Law of Demand

This is the big one! The Law of Demand states that...

"Ceteris paribus, when the price of a good increases, the quantity demanded of it will decrease, and when the price of a good decreases, the quantity demanded of it will increase."

Let's break that down into simple English:

  • If Price goes UP ↑, Quantity Demanded goes DOWN ↓.
  • If Price goes DOWN ↓, Quantity Demanded goes UP ↑.

It's an inverse relationship. They move in opposite directions!

Hang on, what's "Ceteris Paribus"?

This is a fancy Latin phrase that economists love. It just means "other things being equal" or "holding all other factors constant". We use it to isolate the relationship between just two things: price and quantity demanded. We pretend that nothing else in the world (like your income or the weather) is changing, just so we can see the effect of price clearly.

Why does the Law of Demand work? (Thinking about Price)

When the price of a good changes, its relative price (its price compared to other goods) also changes. This affects your opportunity cost of buying it!

Example: Imagine a cup of bubble tea costs $20 and a cup of coffee also costs $20. The relative price is 1:1.
Now, the bubble tea shop has a sale, and the price drops to $10. The coffee is still $20.
Suddenly, the bubble tea is relatively cheaper than the coffee. The opportunity cost of buying bubble tea has gone down. You are now more likely to choose the bubble tea. That's the law of demand in action!

Digging Deeper: Full Price

Sometimes, the price tag isn't the only cost. The full price of a good includes both the money you pay and any other costs, like your time.

Full Price = Money Price + Non-monetary Costs (e.g., time spent queuing)

Changes in the money price can change the relative *full price* and affect what we buy. Let's see how a lump-sum fee changes things:

Example: You're buying oranges from a farm. High-quality oranges cost $10 per box, and low-quality oranges cost $5 per box. The relative price of high-quality oranges is $10/$5 = 2.

Now, you have to pay a fixed delivery fee of $40, no matter what you buy. This is a lump-sum fee.

Step 1: Calculate the new full prices.
Full price of high-quality = $10 (money) + $40 (delivery) = $50
Full price of low-quality = $5 (money) + $40 (delivery) = $45

Step 2: Calculate the new relative price.
New relative price = $50 / $45 = 1.11

The relative price of the high-quality oranges has fallen from 2 to 1.11! This means you are now more likely to buy the high-quality oranges. This explains why people often buy higher-quality goods when they have to pay a fixed extra cost like shipping or a ticket to get into a market.

Key Takeaway for Section 1

The Law of Demand shows an inverse relationship between a good's price and the quantity people are willing and able to buy, assuming other factors don't change (ceteris paribus). A lower price means a lower opportunity cost, encouraging us to buy more.


Section 2: Showing Demand - Schedules and Curves

The Demand Schedule: A Simple Table

A demand schedule is a table that shows the quantity demanded of a good at different prices.

Demand Schedule for Ice Cream Cones

Price per Cone ($) | Quantity Demanded per week
---------------------|---------------------------
5 | 10
4 | 20
3 | 30
2 | 40
1 | 50

See? As the price drops, the quantity demanded rises. It's the Law of Demand in a table!

The Demand Curve: A Picture is Worth a Thousand Words

A demand curve is just a graph of the demand schedule. It's a visual representation of the Law of Demand.

Key features of a demand curve:

  • The vertical axis shows Price (P).
  • The horizontal axis shows Quantity Demanded (Qd).
  • The curve slopes downwards from left to right, showing the inverse relationship.
Quick Review Box

Demand Schedule = A table showing P and Qd.
Demand Curve = A downward-sloping graph showing P and Qd.
Both show the same thing: Price ↓, Quantity Demanded ↑.


Section 3: Change in Quantity Demanded vs. Change in Demand

This is one of the trickiest parts of demand, but don't worry! Once you get it, you'll never forget it. These two phrases sound similar, but they mean completely different things.

"Change in Quantity Demanded"

This happens for ONE reason and one reason only: a change in the good's OWN PRICE.

  • It is shown as a MOVEMENT ALONG the existing demand curve.
  • Think of it like you're just sliding up or down the same line. The "rules" of your demand haven't changed.
  • Example: If the price of ice cream falls from $4 to $2, we move DOWN the demand curve. The quantity demanded increases. We don't draw a new curve.

"Change in Demand"

This happens when any factor OTHER THAN THE PRICE of the good changes (i.e., when one of the "ceteris paribus" conditions is no longer true).

  • It is shown as a SHIFT of the entire demand curve.
  • A shift to the right means an increase in demand. (People want to buy more at EVERY price).
  • A shift to the left means a decrease in demand. (People want to buy less at EVERY price).
  • Example: If it suddenly becomes a very hot week, people will want more ice cream even if the price stays the same. The whole demand curve shifts to the right.
Common Mistake Alert!

Never, ever say "demand increases because the price fell". This is wrong!
Correct version: "The quantity demanded increases because the price fell." (Movement along the curve).
Correct version: "The demand increased because of the hot weather." (Shift of the curve).

Key Takeaway for Section 3

A change in the good's own price causes a movement along the curve (change in quantity demanded). A change in any other factor causes a shift of the curve (change in demand).


Section 4: The Shifters! Factors that Change Demand

So, what are these "other factors" that can shift the entire demand curve? Let's meet the main culprits!

1. Price of Related Goods

Substitutes: Goods used INSTEAD of each other.

Examples: Coke and Pepsi; MTR and bus; iPhone and Samsung phones.

The Rule: The price of a substitute and the demand for the other good move in the same direction.
If the price of the MTR (substitute) increases, the demand for bus rides will increase (shift right). People switch to the relatively cheaper option.

Complements: Goods used TOGETHER.

Examples: Printers and ink cartridges; video game consoles and video games; cars and petrol.

The Rule: The price of a complement and the demand for the other good move in opposite directions.
If the price of printer ink (complement) increases, the demand for printers will decrease (shift left). It's now more expensive to own and use a printer.

2. Income (Y)

Superior Goods (or Normal Goods): The common stuff.

These are goods for which demand increases when your income increases. Most things fall into this category.

Examples: Eating out at nice restaurants, buying new clothes, going on holiday.

The Rule: If Income ↑, Demand for superior goods ↑ (shifts right).

Inferior Goods: The "budget" options.

These are goods for which demand decreases when your income increases. As you get richer, you switch away from them.

Examples: Instant noodles, canned food, taking the bus (for some people who can now afford a taxi).

The Rule: If Income ↑, Demand for inferior goods ↓ (shifts left).

3. Price Expectation

What you think will happen to the price in the future affects how much you buy today.

The Rule: If you expect the price to rise soon, your demand today will increase (shift right).
Example: If there are rumours that the price of toilet paper will go up next week, people will rush to buy it today.

4. Other Factors

This is a catch-all for a few other things:

  • Tastes and Preferences: If a product becomes more popular (e.g., a celebrity uses it), demand for it will increase (shift right).
  • Weather: On a hot day, demand for air conditioners and ice cream increases (shifts right). On a cold day, demand for heaters and jackets increases.
Key Takeaway for Section 4

Any change in related goods' prices, income, expectations, or tastes can cause the entire demand curve to shift left (decrease) or right (increase). These are called changes in demand.


Section 5: From Individual to Market Demand

What's the Difference?

So far, we've mostly talked about individual demand (how much one person buys). But businesses care about market demand, which is the total demand from ALL consumers in a market combined.

How to get Market Demand: Horizontal Summation

It sounds complicated, but it's just simple addition! To find the market demand, we just add up the quantities demanded by every individual at each price level.

This is called horizontal summation because if we were using graphs, we would be adding the quantities along the horizontal (Q) axis.

Example Schedule: Market for Boba Tea

Price ($) | Tom's Qd | Jerry's Qd | Market Qd (Tom + Jerry)
---|---|---|---
20 | 1 | 2 | 3
15 | 3 | 5 | 8
10 | 5 | 8 | 13

The market demand curve will also be downward sloping, but it will be further to the right than any single individual's demand curve.

Factors Affecting Market Demand

All the demand shifters we learned in Section 4 (income, tastes, etc.) also affect market demand. But there is one extra factor that ONLY applies to market demand:

Number of Consumers

This one is just common sense!

The Rule: If the number of buyers in a market increases, market demand will increase (shift right). If the number of buyers decreases, market demand will decrease (shift left).
Example: When a new housing estate is built, the market demand for goods and services at the local shopping centre will increase.

Did you know?

Companies spend millions on market research to understand the factors affecting market demand for their products. By predicting shifts in demand, they can make better decisions about production, pricing, and advertising!

Key Takeaway for Section 5

Market demand is the horizontal sum of all individual demands. It is affected by all the same factors as individual demand, PLUS the number of consumers in the market.


You've Mastered the Law of Demand! - Chapter Summary

Great job! You now understand the fundamental building block of how markets work. Let's do a quick recap:

  • The Law of Demand: Price and quantity demanded have an inverse relationship (one goes up, the other goes down), ceteris paribus.
  • Demand Curve: A downward-sloping graph that shows this relationship.
  • Change in Quantity Demanded: A movement along the curve caused by a change in the good's own price.
  • Change in Demand: A shift of the entire curve caused by factors like income, price of related goods, expectations, tastes, and the number of buyers.
  • Market Demand: The total demand from all consumers, found by adding up individual quantities at each price (horizontal summation).

Keep these concepts in mind, as they will be the foundation for almost everything else we learn in Economics. You're well on your way to thinking like an economist!