AP® Microeconomics review sheet from Aim for Five (aimforfive.com/micro/units/2/2-1)
Unit 2 · Topic 2.1
2.1 Demand
Demand shows how much of a good buyers are willing and able to buy at each price. The law of demand says that as price rises, quantity demanded falls. The key skill is telling a movement along the demand curve (caused by the good's own price) from a shift of the whole curve (caused by anything else).
Key terms
- law of demand
- quantity demanded
- change in demand
- substitution effect
- income effect
- normal and inferior goods
The law of demand
Demand is the whole relationship between price and the amount buyers want, not a single number. Quantity demanded is the amount buyers want at one specific price.
The law of demand: when the price of a good rises, quantity demanded falls, and when the price falls, quantity demanded rises, other things staying the same. On a graph with price on the vertical axis and quantity on the horizontal axis, the demand curve slopes downward from left to right.
Market demand is the sum of every buyer's quantity demanded at each price. If at $3 Ana wants 4 smoothies, Ben wants 2 and Cai wants 1, market quantity demanded at $3 is 7.
You can also read the demand curve as a marginal benefit curve. Its height at any quantity shows the most a buyer would pay for that unit, which is how much the unit is worth to them. Buyers react to prices, but they're also limited by their income, their time and the law, which is why demand counts only what people are willing and able to buy.
Why demand slopes down
- Substitution effect: when a good's price rises, it becomes more expensive compared with other goods, so people switch to substitutes.
- Income effect: a higher price means your income buys less. You're effectively poorer, so you buy less of the good (if it's a normal good).
- Diminishing marginal utility: each extra unit gives less satisfaction (topic 1.6), so people only buy more if the price is lower.
Movement along the curve vs. a shift
When only the good's own price changes, you get a change in quantity demanded: a movement along the same curve. Nothing about the curve itself changes.
A change in anything else that affects buyers causes a change in demand: the whole curve shifts. An increase in demand shifts the curve to the right (more is wanted at every price). A decrease shifts it to the left.
What shifts demand
A normal good is one people buy more of when their income rises. An inferior good is one they buy less of when income rises, usually because they switch to something they like better, such as from bus rides to their own car. 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 celebrity makes a sneaker brand popular |
| Income, for a normal good | Incomes rise, so people buy more restaurant meals |
| Income, for an inferior good | Incomes fall, so people buy more instant noodles |
| Price of a substitute | Coffee's price rises, so demand for tea rises |
| Price of a complement | Printer prices fall, so demand for ink cartridges rises |
| Expectations | Buyers expect the price to rise next month, so they buy more now |
| Number of buyers | A town's population grows |
Worked examples
Try each one yourself first, then open the solution.
- Example 1
Shift or movement?
For the market for gasoline-powered SUVs, decide whether each event shifts demand (and which way) or causes a movement along the curve: (a) the price of gasoline rises sharply; (b) the price of SUVs falls; (c) incomes rise and SUVs are a normal good; (d) a new report makes SUVs less popular.
Show the solutionHide the solution
- Step 1: (a) Gasoline and SUVs are complements. A higher price of a complement lowers demand for SUVs: demand shifts left.
- Step 2: (b) A change in the SUV's own price is a movement along the demand curve: quantity demanded rises. Demand itself doesn't shift.
- Step 3: (c) Higher income raises demand for a normal good: demand shifts right.
- Step 4: (d) Tastes turn against SUVs: demand shifts left.
Answer: (a) shift left, (b) movement along the curve (quantity demanded rises), (c) shift right, (d) shift left.
- Example 2
Inferior good (classic trap)
During a recession, incomes fall and the demand for store-brand cereal increases. What kind of good is store-brand cereal, and what happens to its demand curve when the economy recovers and incomes rise?
Show the solutionHide the solution
- Step 1: Demand rose when income fell, so income and demand move in opposite directions. That defines an inferior good.
- Step 2: When incomes rise again, demand for an inferior good falls, so the curve shifts left.
- Step 3: The trap: assuming every good is normal and shifting demand right when income rises.
Answer: It's an inferior good; when incomes rise, its demand curve shifts left.
Common mistakes
- Saying a price change 'shifts demand'. A change in the good's own price only changes quantity demanded, a movement along the curve.
- Assuming higher income always raises demand. For an inferior good, higher income lowers demand.
- Mixing up substitutes and complements: a higher price of a substitute raises demand, while a higher price of a complement lowers it.
- Shifting demand 'up' and 'down' loosely. Describe an increase as a shift to the right and a decrease as a shift to the left.
On the exam
- Many multiple-choice questions give an event and ask how demand changes; name the determinant first, then decide the direction.
- On free-response graphs, label the vertical axis 'Price' and the horizontal axis 'Quantity', label the original curve D₁ and the new one D₂, and state clearly which way it shifted.
Connected topics
Videos
Check yourself
4 questions on 2.1 Demand. Pick an answer to see if you got it, and why.
A decrease in the price of gasoline, with nothing else changing, causes
Bus rides are an inferior good for many commuters. If commuters' incomes rise, then in the market for bus rides
Coffee and tea are substitutes. If a poor coffee harvest raises the price of coffee, what happens in the market for tea?
Printers and ink cartridges are complements. A large drop in the price of printers will most likely cause which of the following in the market for ink cartridges?
0 of 4 answered