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Exploring how price changes affect the amount of goods people want to buy.
Why do stores have massive 'Black Friday' sales instead of 'Black Friday' price hikes? It's because they know a secret about your brain: the Law of Demand.
At its heart, the Law of Demand is a simple observation about human behavior: when the price of something goes up, people buy less of it. When the price goes down, they buy more. This happens because of the Income Effect (you feel poorer when prices rise) and the Substitution Effect (you look for cheaper alternatives). Economists use the term ceteris paribus, which means 'all other things being equal.' This is important because we assume only the price is changing, not your tastes or how much money you have. We represent price as and the amount people want to buy as Quantity Demanded, or .
Quick Check
If the price of a video game drops from 20, what does the Law of Demand predict will happen to the quantity demanded?
Answer
The quantity demanded will increase.
Imagine a pizza shop. Let's look at their 'Demand Schedule' (a table of prices and quantities): 1. At 20Q_d = 10P = , the shop sells pizzas. 3. Notice that as was cut in half, increased five times! This is the Law of Demand in action.
Quick Check
What does the term 'inverse relationship' mean in the context of demand?
Answer
It means that price and quantity demanded move in opposite directions.
When the price of a product changes, we don't draw a new curve. Instead, we move from one point to another along the existing curve. This is called movement along the demand curve. If the price falls, we move 'down' the curve to a higher quantity (an expansion). If the price rises, we move 'up' the curve to a lower quantity (a contraction). Remember: a change in Price only causes a movement along the curve, never a shift of the entire curve itself.
Let's track a movement for a pair of sneakers: 1. Start at Point A: 100Q_1 = 500P_2 = . 3. We follow the curve down to Point B, where units. 4. The change in price from to caused a movement along the curve from Point A to Point B.
Suppose a graph shows a demand curve for boba tea. At 5Q_d = 100P = , describe the movement: 1. Identify the direction: Since increased, must decrease. 2. Locate the points: You move from to a point like . 3. Describe the visual: This is an upward movement along the curve to the left, representing a decrease in quantity demanded.
Which of the following best describes the Law of Demand?
What is the visual shape of a standard demand curve?
A change in the price of a good causes the entire demand curve to shift to a new position.
Review Tomorrow
In 24 hours, try to sketch a demand curve on a piece of paper. Label the axes and and draw an arrow showing what happens to when increases.
Practice Activity
Next time you are at a grocery store, look for a 'Clearance' or 'Sale' sign. Ask yourself: 'How is the store using the Law of Demand to clear their shelves?'