CH A P T E R 4 SECTION 1 UNDERSTANDING DEMAND
The law of demand says that people will buy less of a good when its price rises, and more of a good when its price falls.
The law of demand states that a good’s price has an important effect on the amount of that good people will buy. The lower the price, the more consumers will buy. Similarly, the higher the price, the less consumers will buy.
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More people will buy a slice of pizza priced at $2 than at $5. The law of demand results from two patterns of human behavior. The first, known as the substitution effect, says that as the price of a good rises, people are more likely to substitute alternative goods. When the price of pizza becomes more expensive compared to other foods, like tacos, people are more likely to buy those other foods. The result is that the demand for pizza drops. However, if the price of pizza drops, consumers are more likely to substitute pizza for other choices. This causes the demand for pizza to rise.
The other pattern is known as the income effect. When the price of pizza and other goods rise, people will buy less pizza. The income effect takes place when a consumer responds to a price increase by being willing to pay the extra money, however they will buy less of the product. A demand curve illustrates the quantities demanded at each price by consumers in the market. The vertical axis shows price, and the horizontal axis shows the quantity demanded. Because demand rises as prices fall, the demand curve slopes down and to the right.
The demand curve shows the relationship between a good’s price and the demand for that good. Since demand increases as prices fall, the curve slopes down to the right.
SHIFTS OF THE DEMAND CURVE
Many factors besides price can change the demand for good
Many other factors besides price can affect the demand for goods. For example, if it was discovered that tomato sauce was extremely good for your health, demand for pizza would rise. Consumers would want to buy more pizza at all price levels. This increase in demand shifts the entire demand curve to the right. If it was announced that tomato sauce was unhealthy, then people would buy less pizza at all price levels. This decrease in demand shifts the demand curve to the left. Other factors can shift the demand curve. For example, if your income were to rise, you might buy more pizza. Higher income causes people to buy more of most goods at every price level. This creates a shift to the right of the demand curve. Similarly, a decrease in income causes demand for most goods to fall. Changes in population will affect demand. For example, an increase in the number of senior citizens is likely to increase the demand for medical care. Advertising and fashion trends can also have a big effect on consumer demand. The demand for one good can also affect the demand for other goods. Complements are two goods that are bought and used together. People who buy skis are likely to buy ski boots. Substitutes are goods used in place of one another. When people buy more snowboards they will buy fewer skis.
An increase in demand causes more of a good to be demanded at all price levels. This shifts the demand curve to the right. A decrease in demand causes less of a good to be demanded, shifting the demand curve to the left.