Demand and what shifts it
The law of demand, market demand, and the difference between moving along the demand curve and shifting it.
FinanceEveryday economicsAbout 5 min: 3 reading, 2 practiceUpdated
General education, not financial advice.
- State the law of demand
- Add individual demands to get market demand
- Tell a movement along the demand curve from a shift, and name what shifts it
Builds toward: Run your own money. Budget so there's room to save, spot and clear costly debt, compare savings and loan offers, and see what interest and inflation do to your money.
Everyday economics: news, prices and choices: lesson 5 of 11
- Everyday economics
- Trade-offs and opportunity cost 5 min
- Thinking at the margin and incentives 5 min
- Models and the circular flow 5 min
- Positive and normative statements 6 min
- Demand and what shifts it 5 min
- Supply, equilibrium and shifts 6 min
- What money is 5 min
- What GDP counts 6 min
- Real and nominal GDP 5 min
- Measuring unemployment 5 min
- The costs of inflation 6 min
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Pairs with any introductory economics textbook; for example N. Gregory Mankiw, Principles of Macroeconomics (6th ed.), chapter 4
What it is
A market is a group of buyers and sellers of a good. Mankiw's models assume a competitive market: so many buyers and sellers that none of them can set the price on their own.
The quantity demanded is how much of a good buyers are willing and able to buy at a given price. The law of demand: other things equal, when the price of a good rises, the quantity demanded falls; when the price falls, the quantity demanded rises.
Mankiw's example is one person's monthly demand for ice-cream cones:
| Price per cone | Cones a month |
|---|---|
| 0.00 | 12 |
| 0.50 | 10 |
| 1.00 | 8 |
| 1.50 | 6 |
| 2.00 | 4 |
| 2.50 | 2 |
| 3.00 | 0 |
This table is a demand schedule. Drawn as a graph, with price on the vertical axis, it gives a downward-sloping demand curve.
Market demand is the sum of everyone's quantities at each price: add the quantities across buyers, price by price.
Quick check
Tap an answer to check it.
At 1.50 a cone, one buyer wants 6 cones and another wants 4. What is market demand at that price?
- Market demand adds the quantities; it doesn't average them
Show answer
10 cones. Add the individual quantities at the same price.
Why it matters
Along the curve or a shift? A change in the good's own price moves you along the demand curve. A change in anything else that affects buyers shifts the whole curve: more (or less) is wanted at every price. Mankiw lists five such variables:
- Income. For a normal good, demand rises when income rises. For an inferior good, demand rises when income falls; Mankiw's example is bus rides, which people use more when they can't afford a car or taxi.
- Prices of related goods. If a fall in the price of one good reduces demand for another, they are substitutes (ice cream and frozen yoghurt). If a fall in the price of one raises demand for another, they are complements (ice cream and hot fudge; petrol and cars).
- Tastes. Economists don't usually explain tastes, but they study what happens when tastes change.
- Expectations about future income or prices.
- The number of buyers.
A shift to the right is an increase in demand; a shift to the left is a decrease.
Text description
A downward-sloping demand curve for ice-cream cones, from 12 cones at a price of 0 to none at 3.00; the dots mark 4 cones at 2.00 and 8 cones at 1.00, a movement along the curve. A dashed curve to the right shows an increase in demand, with an arrow pointing right: at every price, more cones are wanted. A change in the cones' own price moves along the curve; a change in income, related prices, tastes, expectations or the number of buyers shifts it.
Worked example
Is each a movement along the demand curve for coffee, or a shift?
| Event | Effect on the coffee demand curve |
|---|---|
| The price of coffee rises | Movement along: a smaller quantity demanded |
| A study says coffee is good for you | Shift right: tastes change |
| The price of tea, a substitute, falls | Shift left: some buyers switch to tea |
| The price of milk, a complement, rises | Shift left: coffee with milk costs more |
| Incomes rise (coffee is a normal good) | Shift right |
Only the first is about coffee's own price, so only the first is a movement along the curve.
Common mistake
Saying "demand fell" when the price of the good rose. A higher price reduces the quantity demanded (a movement along the curve), not demand (the whole curve). Keep "demand" for shifts caused by the other variables.
Key terms
- market
- a group of buyers and sellers of a particular good or service
- competitive market
- a market with so many buyers and sellers that each has a negligible effect on the price
- quantity demanded
- the amount buyers are willing and able to buy at a given price
- law of demand
- other things equal, the quantity demanded falls when the price rises
- demand curve
- a graph of the relationship between price and quantity demanded
- normal good
- a good whose demand rises when income rises
- inferior good
- a good whose demand rises when income falls
- substitutes
- goods for which a fall in the price of one reduces demand for the other
- complements
- goods for which a fall in the price of one raises demand for the other
Practise the key terms
Tap a card to turn it over. 9 cards.
| Front | Back |
|---|---|
| market | a group of buyers and sellers of a particular good or service |
| competitive market | a market with so many buyers and sellers that each has a negligible effect on the price |
| quantity demanded | the amount buyers are willing and able to buy at a given price |
| law of demand | other things equal, the quantity demanded falls when the price rises |
| demand curve | a graph of the relationship between price and quantity demanded |
| normal good | a good whose demand rises when income rises |
| inferior good | a good whose demand rises when income falls |
| substitutes | goods for which a fall in the price of one reduces demand for the other |
| complements | goods for which a fall in the price of one raises demand for the other |
Practice
Sort it
Which group does this belong to?
The price of cinema tickets falls; more tickets are bought
The good's own price changedShow answer
Movement along the curve. The good's own price changed
A popular film series ends and fewer people want to go
Tastes changedShow answer
Shift of the curve. Tastes changed
The price of streaming, a substitute, rises
The price of a related good changedShow answer
Shift of the curve. The price of a related good changed
A new town is built near the cinema
The number of buyers roseShow answer
Shift of the curve. The number of buyers rose
The cinema raises prices and sells fewer tickets
The good's own price changedShow answer
Movement along the curve. The good's own price changed
Work it through
Three buyers' quantities at a price of 4: Ann 5, Bo 3, Cy 0. At a price of 2: Ann 8, Bo 6, Cy 4.
- 5 + 3 + 0
- 8 + 6 + 4
- 18 − 8
Quick quiz
Tap an answer to check it.
When incomes fall, demand for bus rides rises. What kind of good are bus rides here?
- Demand for a normal good falls when income falls
Show answer
An inferior good. Mankiw's own example of an inferior good.
The price of hot fudge falls and people buy more ice cream. What are the two goods?
- For substitutes, a fall in one price reduces demand for the other
Show answer
Complements. They are used together.
In short
- Law of demand: a higher price means a smaller quantity demanded, other things equal.
- Market demand adds individual quantities at each price.
- The good's own price moves you along the curve; income, related prices, tastes, expectations and the number of buyers shift it.
- Normal and inferior goods; substitutes and complements.
Mastery check
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Check yourself
Answer in your head first, then open the answer. Nothing is saved.
In Mankiw's schedule, how many cones a month are wanted at 2.00?
Show answer
4.
Does a change in the good's own price shift the demand curve?
Show answer
No; it is a movement along the curve.
Name the five variables that shift demand in Mankiw's list.
Show answer
Income, prices of related goods, tastes, expectations and the number of buyers.
Further reading
- N. Gregory Mankiw, Principles of Macroeconomics, 6th ed. (South-Western Cengage, 2012), chapter 4.
- On this site: Supply, equilibrium and shifts.
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