Lecture: Demand
Lecture script · about 15–20 minutes spoken · Week 3
Opening
Picture a small bakery. One morning the owner raises the price of a croissant, and the line at the counter gets shorter. Now picture a city transit planner. A new apartment block opens near a bus stop, and suddenly there are more riders at every fare. Both of them are watching buyers. But they're watching two very different things happen, and telling those two things apart is the whole job of this lecture.
Here's where we are. In Week 1 you met scarcity, opportunity cost, and the habit economists call ceteris paribus, which means holding everything else fixed while one thing changes. In Week 2 you saw why two producers both gain when they specialize and trade. This week we start the course's central model, the market, and we build its first half: the buyers.
So here's the plan. I'll start with the law of demand, the one pattern every buyer follows. Then we'll write it as a table, draw it as a line, and add buyers together. After that comes the big idea of the week: the difference between sliding along the line and moving the whole line. We'll finish with the list of things that move it, and a routine for avoiding the classic mistakes. Next week, in Week 4, Supply & Market Equilibrium, sellers join the picture.
1. The law of demand
Think about the last time something you buy often got more expensive. Maybe you bought it less often. Maybe you switched to something else. Either way, you didn't need a theory to react. A higher price made you want less of it.
That pattern has a name. The law of demand says that, with every other influence held fixed, a higher price for a good lowers the quantity buyers want to buy and a lower price raises it. That negative link between price and quantity is why a demand curve slopes downward.
Notice the phrase "every other influence held fixed." That's ceteris paribus from Week 1 doing its job. If incomes and tastes and other prices are all moving at the same time as the price, you can't tell which change caused what. So the law looks at price alone.
The amount buyers want at a price gets its own name too. Quantity demanded is the amount of a good that buyers want to buy at one particular price during a stated period. It changes only when the good's own price changes.
The law of demand is a positive statement. It predicts what buyers will do, and data can test it. It says nothing about whether a price is fair.
Pause and try this. Flights in summer are expensive, and lots of people still fly. Does that break the law of demand?
Ask yourself what else is different in summer.
Here's the answer. No, it doesn't. In summer more people want to travel at every fare, so something other than the price changed, and the law only speaks about the price changing alone.
2. The demand schedule
Now let's write the pattern down. Imagine a list taped beside a register. Down the left side are prices. Beside each price is how many units the market's buyers would take that day. That list is a demand schedule: a table that lists, for each price of a good, the quantity buyers want to buy at that price, with everything else held fixed.
This course runs one market from week to week. It sells a single good by the unit, and its numbers are illustrative, built for this course. Its buyers follow one rule: quantity demanded equals 90 minus 10 times the price.
Let's fill in the schedule, out loud. At 4 dollars, 10 times 4 is 40, and 90 minus 40 is 50, so buyers want 50 units a day. At 5 dollars, they want 40. At 6 dollars, 30. At 7 dollars, 20. And at 8 dollars, 90 minus 80 leaves 10 units a day.
Hear the pattern? Every time the price goes up by 1 dollar, quantity demanded drops by 10 units. That's the law of demand, written in numbers. And if you push the price to 9 dollars, 90 minus 90 is zero. No one buys at 9 dollars or more.
Pause and try this. Using the schedule, how many units do buyers want at 7 dollars, and how many fewer is that than at 6 dollars?
Start from 30 at 6 dollars and take one more step.
Here's the answer. At 7 dollars buyers want 20 units, which is 10 fewer than the 30 they want at 6 dollars, because each 1-dollar rise cuts quantity demanded by 10.
3. The demand curve
A table is exact, but a picture shows the pattern at a glance. So economists draw the schedule as a line. A demand curve is a graph of the demand schedule with price on the vertical axis and quantity on the horizontal axis. It slopes downward from left to right because of the law of demand.
Let me describe our curve so you can hold it in your head. Along the bottom, the horizontal axis, is quantity, running from zero up past 50 units a day. Up the side, the vertical axis, is price in dollars. Now place five dots. At a price of 8 dollars, the dot sits at 10 units, high and to the left. At 4 dollars, it sits at 50 units, low and to the right. The other three fall evenly in between, and all five lie on one straight line. If you extend that line upward, it touches the price axis at 9 dollars, where nobody buys.
Some students find it odd that price, the cause, goes on the vertical axis. It's a convention, and an old one. Alfred Marshall's Principles of Economics, from 1890, drew demand and supply together as the two blades of a pair of scissors. Neither blade cuts alone. This week we're building the demand blade. Next week brings the other.
And a fair caveat: real demand curves are rarely perfectly straight. Our straight line is a classroom model. What carries over to every curve is the downward slope.
Pause and try this. If you walk along the demand curve from the upper left toward the lower right, what happens to price, and what happens to quantity demanded?
Picture the two ends of the line.
Here's the answer. Price falls and quantity demanded rises, because the curve runs from 8 dollars and 10 units down to 4 dollars and 50 units.
4. Market demand
A market is made of many buyers, and each one has a demand of their own. The market's demand is all of them added together. Market demand is the total quantity that all buyers in a market want at each price, found by adding every buyer's quantity at that same price.
Imagine every buyer in town standing in a row, and you call out one price. Each person shouts how many units they'd take. You add up the shouts. That total is one row of the market schedule. Then you call out the next price and do it again.
Our market works out neatly if you read it as ten identical buyers. Each one wants 9 minus the price. At 4 dollars, one buyer wants 5 units, and ten buyers want 50. At 8 dollars, one buyer wants 1 unit, and ten buyers want 10. Those totals land right on the schedule. Real buyers are never identical. One shopper might want 8 units and another none. But the rule for adding them never changes: hold the price still, then add quantities.
Pause and try this. When you build market demand, what do you add, and what do you hold fixed?
Think back to calling out one price at a time.
Here's the answer. You add the buyers' quantities and you hold the price fixed, because each row of market demand belongs to one price.
5. A movement along the curve
Now for the big idea of the week. Picture the price tag changing while nothing else does. Incomes stay put. Tastes stay put. Every other price stays put. Buyers react only to the new price, and on the graph they slide from one dot to another on the same line.
That slide has a name. A movement along the demand curve is a move from one point to another on an unchanged demand curve, caused only by a change in the good's own price. It's a change in quantity demanded.
Let's run it. In our market, the price falls from 6 dollars to 5. At 6 dollars buyers wanted 30 units. At 5 dollars they want 40. That's 10 more units, and every one of them is on the same curve.
So did demand go up? No. And this is where the vocabulary really matters. Demand is the whole relationship between a good's price and the quantity buyers want at each price, shown as a full schedule or a full curve rather than as one number. The schedule still says 50 at 4 dollars and 10 at 8 dollars, exactly as before. Nothing about the line changed. Buyers picked a different spot on it.
Here's an analogy. Think of the demand curve as a staircase you can stand on. A price change moves you up or down a step. It doesn't move the staircase.
Pause and try this. Someone says, "The price fell from 6 to 5 dollars, so demand rose." What would you change in that sentence?
Ask whether the cause was the good's own price.
Here's the answer. I'd change "demand rose" to "quantity demanded rose," because a change in the good's own price slides buyers along the same curve.
6. A shift of the curve
Now leave the price tag alone and change something else. Suppose buyers' incomes go up. At every price on the list, people with more income want more of an ordinary good. So the whole line moves.
A shift of the demand curve is a move of the whole demand curve, caused by a change in something other than the good's own price. It's a change in demand. An increase moves the curve right, and a decrease moves it left.
Let's put numbers on it. Treat our good as a normal good, one buyers want more of when they earn more. When income rises, the rule becomes 110 minus 10 times the price. At 6 dollars, buyers now want 50 units instead of 30. That's 20 more. At 4 dollars, they want 70. At 8 dollars, they want 30. At every single price, 20 more units. The curve has shifted right.
Now run it backward. When income falls, the rule becomes 70 minus 10 times the price. At 6 dollars, buyers want 10 units instead of 30, which is 20 fewer. At 4 dollars, 30. At 5 dollars, 20. The curve has shifted left, and on that lower curve no one buys at 7 dollars or more.
Hold all three lines in your mind at a price of 6 dollars. The lower curve gives 10 units, the original gives 30, and the higher curve gives 50. The price is the same in all three. The 20-unit gaps come from the shift, not from the price.
A common slip is drawing an increase as a move up and to the left, because "increase" sounds like "higher." Read across at any one price instead. More units means further right.
Pause and try this. On the increased curve, how many units do buyers want at 6 dollars, and which direction did the curve move?
Compare it with the 30 units on the original curve.
Here's the answer. Buyers want 50 units at 6 dollars, which is 20 more than on the original curve, so the curve moved right.
7. The determinants of demand
So what can shift a demand curve? Economists sort the causes into a short list. The determinants of demand are the influences other than a good's own price that set how much buyers want at every price: income, the prices of related goods, tastes, expectations about the future, and the number of buyers.
Start with income. For most goods, more income means more demand. A normal good is a good whose demand rises when buyers' incomes rise and falls when incomes fall. Think of running shoes after a raise. But some goods go the other way. An inferior good is a good whose demand falls when buyers' incomes rise and rises when incomes fall, because buyers with more income switch to something they like better. It says nothing about the good's quality. Instant noodles are the classic case: a student who lands a better-paying job may cook fresh meals instead.
Next, related goods. Substitutes are two goods that buyers use in place of each other, so a rise in the price of one raises the demand for the other. Think of bike-share rides and scooter rentals for a short trip downtown. Complements are two goods that buyers use together, so a rise in the price of one lowers the demand for the other. Game consoles and video games are a good pair. If consoles cost more, fewer people own one, so demand for games shifts left.
The last three are quick. Tastes: a cooking show makes a spice blend popular, and demand shifts right. Expectations: shoppers expect a laptop sale next month, so demand this month shifts left. Number of buyers: a new apartment building opens next to a laundromat, and demand for its washers shifts right.
Pause and try this. The price of scooter rentals rises. What happens to the demand for bike-share rides, and why?
Decide first whether these two goods go together or stand in for each other.
Here's the answer. Demand for bike-share rides shifts right, because the two are substitutes, and riders switch away from the pricier scooters.
8. The classic wrong turns
Most mistakes this week aren't deep confusions. They're a word swapped or a curve moved the wrong way. So here's a three-step routine to run every time something changes. First, name the cause. Is it the good's own price, or something else? Second, if it's the own price, say "quantity demanded" and slide along the curve. Third, if it's anything else, say "demand," name the determinant, and shift the whole curve, right for an increase and left for a decrease.
Let's run the routine twice in our market, starting at 6 dollars and 30 units. The price falls to 5 dollars. That's the own price, so it's a movement along the curve, and quantity demanded rises to 40. Now, separately, incomes rise and the good is normal. That's not the own price, so demand shifts right, and at 6 dollars buyers now want 50. The first change moved buyers 10 units along the line. The second moved the whole line 20 units over.
Two more traps to watch for. An inferior good isn't a low-quality good; the name is about how demand responds to income. And a rise in a complement's price lowers demand for its partner, it doesn't raise it.
There's also a limit to what we can say this week. When demand shifts, you'll want to know what happens to the price buyers end up paying. The demand curve alone can't tell you, because that depends on sellers too. That's a question for next week.
Pause and try this. Incomes rise and the good is instant noodles. Which word do you use, "demand" or "quantity demanded," and which way does the curve move?
Run the three steps in order.
Here's the answer. You say "demand," because income isn't the noodles' own price, and the curve shifts left, because instant noodles are an inferior good.
Closing
Let me pull it together. The law of demand says a higher own price lowers quantity demanded, with everything else held fixed. A demand schedule writes that down as prices and amounts, and the demand curve draws it as a downward-sloping line. Market demand adds every buyer's quantity at the same price.
Then the big idea. A change in the good's own price is a movement along the curve, a change in quantity demanded. A change in anything else shifts the curve, a change in demand: right for an increase, left for a decrease. Income, related goods, tastes, expectations, and the number of buyers are the things that shift it. And the three-step routine keeps the words and the directions straight.
Next in this module come the slide deck, the Readings & Resources page, the lecture tutorial, the practice set, and the quiz. Then, in Week 4, Supply & Market Equilibrium, sellers get their own curve, and the two blades of the scissors finally meet.
Built with The Course Maker · samples.thecoursemaker.com