AP® Macroeconomics review sheet from Aim for Five (aimforfive.com/macro/units/1/1-4)
Unit 1 · Topic 1.4
1.4 Demand
Demand shows how much of a good buyers are willing and able to buy at each price. The demand curve slopes downward because people buy less as the price rises. The key skill is telling a movement along the curve (caused only by the good's own price) from a shift of the whole curve (caused by everything else).
Key terms
- law of demand
- quantity demanded
- change in demand
- normal and inferior goods
- substitutes and complements
The law of demand
The law of demand says price and quantity demanded move in opposite directions, holding everything else constant. When the price of tacos rises, people buy fewer tacos; when it falls, they buy more.
On a graph, price (P) goes on the vertical axis and quantity (Q) on the horizontal axis. The demand curve (D) slopes downward from left to right.
Why does it slope down? When the price falls, the good becomes cheaper compared with other things, so people switch toward it (the substitution effect). A lower price also stretches your budget so you can afford more (the income effect). And each extra unit usually adds less satisfaction than the last (diminishing marginal utility), so people buy more only at a lower price.
Quantity demanded vs. demand
These two phrases mean different things, and the exam tests the difference.
A change in quantity demanded is a movement along the same curve. Only a change in the good's own price causes it.
A change in demand is a shift of the entire curve. At every price, buyers now want more (shift right, D1 to D2) or less (shift left).
What shifts demand
A normal good is one people buy more of when income rises. An inferior good is one people buy less of when income rises, because they switch to something they like better. Substitutes are goods used in place of each other; complements are goods used together.
| Determinant | Example that increases demand (shift right) |
|---|---|
| Tastes and preferences | A viral video makes a sneaker brand popular |
| Income, normal good | Incomes rise and people buy more restaurant meals |
| Income, inferior good | Incomes fall and people buy more instant noodles |
| Price of a substitute | Coffee gets more expensive, so demand for tea rises |
| Price of a complement | Game consoles get cheaper, so demand for video games rises |
| Expectations | Buyers expect gas prices to jump next week, so they fill up today |
| Number of buyers | A town's population grows, raising demand for housing |
Why this matters in macro
Macro uses supply and demand graphs for whole markets: the market for money (4.5), loanable funds (4.7) and foreign currency (6.3). The same rule applies in each: a change in that market's own price moves along a curve, and anything else shifts it. The aggregate demand curve in 3.1 looks similar but slopes down for different reasons, so don't mix them up.
Worked examples
Try each one yourself first, then open the solution.
- Example 1
Shift or movement?
Decide whether each event changes demand (shift) or quantity demanded (movement), and which way: (1) the price of coffee rises: effect on the coffee market; (2) the price of coffee rises: effect on the tea market; (3) incomes rise and bus rides are an inferior good: effect on the bus-ride market; (4) people expect new phones to cost more next month: effect on today's phone market.
Show the solutionHide the solution
- Step 1: (1) Coffee's own price changed, so it's a movement up along the coffee demand curve: quantity demanded falls. The curve doesn't shift.
- Step 2: (2) Tea is a substitute for coffee. When coffee costs more, people switch to tea, so demand for tea increases: shift right.
- Step 3: (3) For an inferior good, higher income means people buy less (they switch to driving, say). Demand for bus rides decreases: shift left.
- Step 4: (4) Expecting a higher future price makes people buy now. Demand today increases: shift right.
Answer: (1) Quantity demanded of coffee falls (movement along D). (2) Demand for tea increases (shift right). (3) Demand for bus rides decreases (shift left). (4) Today's demand for phones increases (shift right).
Common mistakes
- Saying "demand fell" when the good's own price rose. A price change causes a change in quantity demanded, a movement along the curve.
- Assuming every good is normal. If the question says a good is inferior, a rise in income shifts its demand left.
- Mixing up substitutes and complements. A higher price for a substitute raises demand; a higher price for a complement lowers it.
- Labeling the axes "price level" and "real GDP" on a single-market graph. For one market, use price and quantity.
On the exam
- Most questions describe an event and ask what happens to demand, or which determinant caused a shift. Ask yourself first: did the good's own price change?
- Practice the vocabulary carefully. Answer choices often differ only by "demand" vs. "quantity demanded."
Connected topics
Videos
Check yourself
4 questions on 1.4 Demand. Pick an answer to see if you got it, and why.
Which of the following would increase the demand for hamburgers?
If the price of movie tickets rises and nothing else changes, which of the following will occur in the market for movie tickets?
Consumer incomes rise, and as a result the demand for bus rides decreases. For these consumers, bus rides are
The price of gasoline increases sharply. In the market for large pickup trucks, which use a lot of gasoline, which of the following is most likely?
0 of 4 answered