What Is the Law of Demand?
The law of demand is the result of two separate
behavior patterns that overlap, the substitution effect and the income effect.
These two effects describe different ways that a
consumer can change his or her spending patterns for other goods.
The Substitution Effect and
The Substitution Effect
The substitution effect occurs when consumers react to
an increase in a good’s price by consuming less of that good and more of
The Income Effect
The income effect happens when a person changes his or
her consumption of goods and services as a result of a change in real income.
The Demand Schedule
A demand schedule is
a table that lists the quantity of a good a person will buy at each different
A market demand schedule
is a table that lists the quantity of a good all consumers in a market will buy
at each different price.
The Demand Curve
A demand curve is a
graphical representation of a demand schedule.
When reading a demand curve,
assume all outside factors, such as income, are held constant.
Shifts in Demand
Ceteris paribus is a
Latin phrase economists use meaning “all other things held
A demand curve is accurate only as long as the ceteris
paribus assumption is true.
When the ceteris paribus assumption is dropped,
movement no longer occurs along the demand curve. Rather, the entire demand
What Causes a Shift in Demand?
Several factors can lead to a change in demand:
Prices of Related Goods
Complements are two goods that are bought and used
together. Example: skis and ski
Substitutes are goods used in place of one another. Example: skis and snowboards
What Is Elasticity of Demand?
Demand for a good that consumers will continue to buy
despite a price increase
Demand for a good that is very sensitive to changes in
price is elastic.
Factors Affecting Elasticity
Several different factors can affect the elasticity of
demand for a certain good.
Elasticity and Revenue
A company’s total revenue is the total amount of
money the company receives from selling its goods or services.
Firms need to be aware of the elasticity of demand for
the good or service they are providing.
If a good has an elastic demand, raising prices may
actually decrease the firm’s total revenue.