Demand
Economics – Chapter 3
Demand
 The amount of a good or service that a
consumer is willing and able to buy at
various possible prices during a given
time period. It is more than just the
desire to purchase a product.

The two important conditions are:
1. The consumer must be willing and able to
buy the good or service.
2. The demand for the product must be
examined for a specific time period (day,
week, month, year, etc.)
Law of Demand
 States that an increase in a good’s price
causes a decrease in the quantity
demanded and a decrease in price
causes an increase in the quantity
demanded.
Example:
 You expect to buy an ipod for $200, and you
have saved that amount. At the store, you
discover that the price of the ipod has
increased from $200 to $300. Even if you were
able to pay the higher price, you might not be
willing to do so. Some other consumers also
will be unwilling or unable to pay the higher
price. In other words, the price increase will
lead to a decrease in the quantity demanded
 Two economic concepts help explain the
Law of Demand:
1. Income Effect
 The amount of money, or income, that people
have available to spend on goods and services
is called their purchasing power – as a
consumer’s purchasing power increases, his or
her demand for goods and services also tends
to increase (and vice versa)
 Any increase or decrease in consumers’
purchasing power caused by a change in price
is called the income effect.
Income Effect
Example:
 If a store lowers the price of its CDs from $15
to $10, a consumer can buy more CDs with the
same amount of money. A person spending
$30 can buy 3 CDs at the new price of $10, but
could have purchased only 2 CDs at the
previous price of $15. The lower price
increases the consumer’s purchasing power
and increases the quantity of CDs demanded
from 2 to 3.
2. Substitution Effect
 The substitution effect describes the
tendency of the consumers to substitute
a similar, lower-priced product for another
product that is more expensive.
Substitution Effect
Example:
 When the price of steak increases, many
consumers reduce the quantity of beef
demanded and buy more chicken, a
lower-priced substitute.

There are 2 ways to show the relationship
between the price of a good or service and
the quantity that consumers demand:
1. Demand Schedule – this information lists the
quantity of goods that consumers are willing and
able to buy at a series of possible prices.
2. Demand Curve – plots information, often from a
demand schedule, on a chart.
 Because markets do not stand still,
demand curves will shift to the left
(decrease in demand) or the right
(increase in demand) over a given time
period.
Shifts in demand are caused
by:
1.
2.
3.
4.
5.
Consumer taste and preferences
Market size
Income
Prices of related goods or services
Consumer expectations