Welcome to the World of Demand!

Hello future economists! This chapter is absolutely critical—it’s the foundation for understanding how prices are decided in the market. When we talk about demand, we are figuring out what consumers want and, crucially, what they are able to buy.
Don't worry if graphs and jargon seem tricky at first. We will break down every concept step-by-step using simple language and real-life examples!

What You Will Learn:

  • What demand truly means (it’s not just wishing for something!).
  • The famous Law of Demand.
  • How to draw and understand the Demand Curve.
  • The non-price factors that cause demand to increase or decrease.

Section 1: Defining Demand

In everyday life, if you want a new phone, you say you "demand" it. But in Economics, Demand has a very specific meaning.

What is Economic Demand?

Demand is the quantity of a good or service that consumers are both willing and able to purchase at a given price during a specific period of time.

Notice the two critical parts:

  1. Willingness: Do you want the product?
    Example: You love luxury sports cars.
  2. Ability to Pay: Can you actually afford the product?
    Example: Unless you have millions in your bank account, your willingness to buy a sports car is not "demand."

If you are willing but unable to pay, it is just a want or desire, not economic demand. Demand only exists when desire meets purchasing power.

Quick Takeaway:

Demand = Willingness + Ability to Pay (at a specific price).

Section 2: The Law of Demand and Ceteris Paribus

The core idea behind demand is beautifully simple, summarized in the Law of Demand.

The Law of Demand

The Law of Demand states that there is an inverse relationship between the price of a good and the quantity demanded.

In simple terms:

  • If the Price (P) of a product goes UP, the Quantity Demanded (Qd) will go DOWN.
  • If the Price (P) of a product goes DOWN, the Quantity Demanded (Qd) will go UP.

Why? It makes sense! If the price of your favourite chocolate bar suddenly doubles, you’ll probably buy less of it and switch to a cheaper snack.

The Importance of Ceteris Paribus

When economists state the Law of Demand, they always include a very important condition: ceteris paribus.

Ceteris Paribus is a Latin phrase meaning “all other things being equal” or “holding everything else constant.”

We must use this assumption because, in the real world, many things change at once (income, weather, trends, etc.). To test the relationship between Price and Quantity Demanded, we must pretend that *only* the price is changing.

Analogy: Imagine testing how fast a runner can run. You only change the shoe type. You must assume "ceteris paribus"—that the weather, the track, the runner's diet, and their level of sleep remain exactly the same.

Quick Review Box:

The Law of Demand only holds true if we apply Ceteris Paribus. If other factors (like income or fashion) change, the law itself doesn't break, but the whole demand picture shifts (see Section 4).

Section 3: Visualizing Demand – The Demand Curve

Economists use a graph called the Demand Curve (D) to visualize the Law of Demand.

Drawing the Demand Curve

The demand curve shows the relationship between Price and Quantity Demanded.

  • The vertical axis (Y-axis) always measures Price (P).
  • The horizontal axis (X-axis) always measures Quantity Demanded (Qd).

Because of the inverse relationship (high price = low quantity), the demand curve always slopes downwards from left to right.

Movement Along the Curve: Change in Quantity Demanded

When the price of the good itself changes, we see a movement along the existing demand curve. This is known as a change in quantity demanded.

  • Example: If the price of apples falls from \$2 to \$1, consumers move to a lower point on the curve and buy more apples.

Remember this golden rule:

Price changes = Movement Along the Curve (Change in Quantity Demanded)


Did you know? The downward slope reflects the fact that as a product becomes cheaper, more people can afford it (the Income Effect) and it becomes a better deal compared to substitutes (the Substitution Effect).

Section 4: What Changes Demand? (Shifts in the Curve)

What happens if something other than the price of the good itself changes? For example, what if a popular celebrity starts promoting a product, or if people suddenly earn more money?

When a non-price factor changes, the assumption of ceteris paribus is broken, and the entire relationship between price and quantity changes. This causes the Demand Curve to Shift.

A shift means a new curve is drawn, either to the right (increase in demand) or to the left (decrease in demand).

  • Shift Right (D to D1): Means an Increase in Demand (consumers want more at every single price).
  • Shift Left (D to D2): Means a Decrease in Demand (consumers want less at every single price).

The Main Determinants (Factors) of Demand

These are the factors that cause the demand curve to shift.

1. Changes in Income (I)

How consumers react to a change in their income depends on the type of good:

a. Normal Goods

These are most goods. When income rises, consumers buy more of them.
Income ↑, Demand for Normal Goods ↑ (Shift Right)
Example: Restaurant meals, new clothing, holidays.

b. Inferior Goods

These are typically cheaper goods that consumers switch away from when they can afford better options.
Income ↑, Demand for Inferior Goods ↓ (Shift Left)
Example: Basic, cheap instant noodles, second-hand clothing, or using public transport instead of buying a car.

2. Changes in the Price of Related Goods (Pr)

The demand for one good is often linked to the price of other goods.

a. Substitutes

Goods that can be consumed instead of another.
Example: Tea and Coffee, Netflix and Disney+.
Rule: Price of Substitute ↑, Demand for Original Good ↑ (Shift Right)
If the price of Pepsi increases, people switch to Coke, increasing the demand for Coke.

b. Complements

Goods that are consumed together.
Example: Printers and Ink Cartridges, Cars and Petrol, Popcorn and Cinema Tickets.
Rule: Price of Complement ↑, Demand for Original Good ↓ (Shift Left)
If the price of petrol massively increases, people will be less likely to buy large, petrol-guzzling cars.

3. Changes in Tastes, Trends, and Fashion (T)

If a product becomes fashionable, demand increases. If it goes out of style, demand decreases.
Example: A sudden interest in retro video games increases demand (Shift Right). A health scare about processed meat decreases demand for burgers (Shift Left).

4. Changes in Population and Demographics (P)

A larger population naturally means more consumers and higher overall demand.
Example: An increasing birth rate increases the demand for baby products (Shift Right). An aging population increases the demand for retirement services and care homes (Shift Right).

5. Changes in Expectations of Future Prices (E)

If consumers believe the price of a product will rise soon, they will buy it now.
Example: If the government announces that sales tax on cigarettes will double next month, the current demand for cigarettes will increase dramatically (Shift Right).

Common Confusion Alert!

DO NOT confuse:

1. Change in Quantity Demanded: Caused ONLY by a change in the price of the good itself (movement along the curve).

2. Change in Demand: Caused by a change in any other factor (Income, Tastes, etc.) (shift of the entire curve).

Memory Aid for Determinants:

Remember the factors that shift demand with the simple mnemonic: T.I.P.E.S.

Tastes (and fashion)
Income (and its distribution)
Price of Related Goods (Substitutes and Complements)
Expectations (of future prices)
Size of Population (and demographics)

Chapter Summary and Key Takeaways

You now have a strong grasp of the fundamentals of demand. Congratulations! Remember that demand is the starting point for determining market prices.

Quick Review:

  • Demand requires both the willingness and ability to pay.
  • The Law of Demand: Price and Quantity Demanded move in opposite directions (inverse relationship), assuming ceteris paribus.
  • Changes in the Price of the good cause a movement along the curve (change in Quantity Demanded).
  • Changes in non-price factors (T.I.P.E.S.) cause the curve to shift (change in Demand).

Keep practicing those shifts—understanding what moves the demand curve is the secret to mastering market analysis!