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Wize AP Macroeconomics Textbook > Demand and Supply

Demand

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Demand

  • Demand - the entire curve showing how much consumers want to buy at every price level
  • Quantity Demanded - a specific point on the demand curve.

Law of Demand - tells us that as price rises, quantity demanded will
decrease
.
Example: In the diagram above, when the price increases from $40 to $50, the quantity demanded falls from 30 units to 25 units, but demand does not change (no shift).

Wize Tip
Watch Out: A change in price only causes a change in Quantity Demanded (movement along the curve), but NOT DEMAND (no shift)

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Shifts in Demand

  • Income level
  • Normal goods: When income increases, demand shifts
    right
    and when income decreases demand shifts
    left
  • Inferior goods: When income increases, demand shifts
    left
    and when income decreases demand shifts
    right
  • Price of related goods
  • Complements: when the price of one product increases, the demand for the other product
    decreases
    Example: Cars and gas - when the price of cars increase, people will buy less cars and less gas.
  • Substitutes: when the price of one product increases, the demand for the other product
    increases
    Example: Pepsi and Coke - when the price of Pepsi increases. people will buy less Pepsi and more Coke.


  • Expectations If prices are expected to rise in the future, today the demand will shift
    right
  • Population size Larger population means demand shifts
    right
  • Tastes and Preferences If it's basketball season demand for basketball jerseys shifts
    right
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Example: Demand

Which of the following would cause the demand to shift left?

a) an increase in the price of the product
b) a decrease in the price of the product
c) a decrease in income when the product is inferior
d) a increase in the price of a complementary good

D. If the price of cars increase, consumers will buy less cars and so the demand for gas (complementary good) will decrease.
It's not option A or B because a change in price only causes movement along the curve (no shift).
Option C is wrong because if there is a decrease in income you will buy more inferior goods (like fast food) so demand would shift right.



Practice: Demand

If product X and Y are substitutes and there is an increase in the price of X, which of the following will happen: