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Demand is the amount of a good or service that buyers are willing and able to purchase at each possible price. The good’s own price usually changes quantity demanded along the existing demand curve; changes in income, preferences, related-goods prices, buyers, or expectations can shift the whole curve.
What demand and the demand curve show
In economics, demand describes the relationship between a good’s price and the quantity buyers are willing and able to purchase over a defined period. A demand curve graphs that relationship, with quantity on the horizontal axis and price on the vertical axis. To interpret a real example, specify the market, time period, and unit—for instance, weekly coffees purchased in one city.
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Demand is not the same as quantity demanded. Demand is the full relationship across possible prices; quantity demanded is one amount at one particular price. A point on a demand curve therefore represents a particular price and quantity, while the curve represents the set of such combinations. OpenStax explains demand, quantity demanded, and market curves.
Movement along a curve or a shift?
Economists usually analyze one market while holding other relevant conditions constant, an assumption called ceteris paribus. Under that assumption, a change in the good’s own price changes quantity demanded and moves the market to a different point on the same demand curve. It does not, by itself, change demand.
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A change in a non-price determinant changes the amount buyers want at each given price. That shifts the demand curve: right for an increase in demand and left for a decrease. Keep the distinction clear by asking whether the comparison is between two points on one curve or between two different curves. OpenStax summarizes this distinction.
What shifts demand?
Tastes and preferences
If buyers become more interested in a good, demand can rise; if they lose interest, it can fall. A change in preferences for chicken relative to beef, for example, could shift demand for one or both meats. The direction and size depend on buyers’ actual choices in the market, not simply on the fact that tastes changed.
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Number and composition of buyers
More buyers in a market can increase demand at each price. The composition of buyers matters too: a population change may affect demand differently depending on which consumers enter or leave the market and what they prefer.
Income
For a normal good, higher buyer income tends to increase demand, while lower income tends to reduce it. For an inferior good, the relationship runs the other way: higher income tends to reduce demand, and lower income tends to increase it. A given income change therefore need not move demand for every good in the same direction.
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Prices of related goods
Substitutes are goods buyers may use in place of one another. If the price of a substitute rises, demand for the good in question tends to rise. Complements are goods often used together; if a complement’s price rises, demand for the good in question tends to fall. These relationships depend on how the buyers in the market actually regard and use the goods. Laptops can serve as an illustration of substitution, while golf clubs and golf balls can illustrate complementary use, but no pair is automatically a substitute or complement for every buyer. OpenStax discusses these demand shifters and examples.
Expectations about the future
Expectations can alter current buying. If buyers expect a good’s price to rise, they may buy more now; if they expect it to fall, they may wait. The effect depends on the good and the expectation involved, so an expected future change does not always imply the same direction for current demand.
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How a demand shift changes market equilibrium
Market equilibrium is where the quantity buyers want equals the quantity sellers offer. To predict what happens after an event, identify whether it affects demand or supply, determine the direction of the relevant curve shift, and then compare the new equilibrium with the starting point. The conclusion about price and quantity requires a stated assumption about the other curve.
- Describe the starting market. Identify the good, time period, initial equilibrium price and quantity, and the supply curve being considered.
- Classify the event. A change in the good’s own price is a movement along demand; a change in a demand determinant shifts demand. Also consider whether the event affects supply instead.
- Set the direction. Greater demand shifts the demand curve right; lower demand shifts it left. Apply the same right-or-left reasoning to supply if the event changes sellers’ conditions.
- Compare equilibria. With supply unchanged, a rightward demand shift leads to a higher equilibrium price and quantity; a leftward demand shift leads to a lower equilibrium price and quantity. If supply shifts too, the outcome depends on both changes, so do not infer it from demand alone.
This sequence prevents a common error: treating a higher price for the good itself as a demand increase. That price change alters quantity demanded on the existing curve; a separate determinant must change for the demand curve to shift. OpenStax sets out a four-step approach to changes in equilibrium.
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