- How markets work — buyers and sellers
- Opportunity cost — the true cost of every choice
- Plotting straight-line graphs · coming soon
- What shifts demand? — the non-price factors
- Supply — how much sellers offer at each price
- The law of demand and the demand curve
A question with no answer, until you add a price
Here is a simple question. How many cups of bubble tea do you want this week?
You cannot answer it yet. You need to know the price. At $3 a cup, maybe you would buy two. At $5, maybe one. At $10, almost certainly none: you would drink something else.
So "how much do you want?" has no single answer. Your honest answer is a list: so many cups at this price, so many at that price. That list is what economists mean by demand.
The lecture on how markets work showed that a market brings buyers and sellers together, and that a price is found by both sides searching. It said that later lectures would turn each side of the market into a list. This lecture builds the first list, the buyers' side. You will see where the list comes from, why it almost always slopes the same way, and how one government used it.
What economists mean by demand
Demand is the quantity of a good or service that buyers are willing and able to buy at each possible price, in a given period of time.
Each part of this definition does a job.
- Willing and able. Wanting is not enough. A student with $40 in savings may dream of a new motorbike, but that wish is not demand. Demand counts only wanting backed by money.
- At each possible price. Demand is not one number. It is the whole list, from the lowest price to the highest.
- In a given period of time. "300 cups" means nothing until you add "per day" or "per year".
One number from the list has its own name. The amount buyers want at one particular price is the quantity demanded at that price. So "demand" is the whole list, and "quantity demanded" is one line of it. Keep these two words apart. The whole topic depends on it.
Where the list comes from: each buyer's highest price
In that lecture, every buyer had a highest price: the most they would pay. Above it, they keep their money. This one idea is enough to build a demand list.
In an invented school, Leila runs a juice stall at the fair. Each of the 24 students in her year will buy at most one cup a day. Leila asks each of them for the highest price they would pay. In this class, the answers happen to be spread evenly: three students say $4.00, three say $3.50, three say $3.00, and so on, down to three who say $0.50.
Think first. If Leila charges $2.50, who buys?
Everyone whose highest price is $2.50 or more. That is the students who said $2.50, $3.00, $3.50 or $4.00. Four groups of three students make . So at $2.50, the quantity demanded is 12 cups per day.
Do the same count at every price, and you have the whole list.
| Price of a cup ($) | Students whose highest price is this or more | Quantity demanded (cups per day) |
|---|---|---|
| 0.50 | all 8 groups | 24 |
| 1.00 | 7 groups | 21 |
| 1.50 | 6 groups | 18 |
| 2.00 | 5 groups | 15 |
| 2.50 | 4 groups | 12 |
| 3.00 | 3 groups | 9 |
| 3.50 | 2 groups | 6 |
| 4.00 | 1 group | 3 |
| 4.50 | no one | 0 |
Check. At the lowest price, everyone buys: 24 cups. ✓ Above the highest answer, $4.00, nobody buys. ✓ Each rise of $0.50 loses exactly one group of three. ✓
A table like this is called a demand schedule. Nobody decided that its numbers should fall. They fall because each rise in price passes some buyers' highest price, and those buyers leave. The ones who stay value a cup more.
Now build the picture yourself.
Move the price. At each price, count the students who will still buy, and the point is plotted. Visit all nine prices from $0.50 to $4.50 to finish the curve.
This box shows how each price in Leila's demand schedule gives one point on a graph. Price goes up the side and quantity along the bottom.
| Price ($) | Who buys | Point plotted (quantity, price) |
|---|---|---|
| 0.50 | all 24 students | (24, 0.50) |
| 2.00 | 15 students with a highest price of $2.00 or more | (15, 2.00) |
| 3.00 | 9 students with a highest price of $3.00 or more | (9, 3.00) |
| 4.50 | no one | (0, 4.50) |
Every rise of $0.50 loses the three students whose highest price has just been passed. All nine points lie on one straight line, sloping down from left to right. That line is the demand curve, D, shown in the figure below.
You should have seen two things. First, every rise in price loses the buyers whose highest price it has just passed. Second, the points fall into a line that slopes down from left to right. That line is the demand curve. Economists call it a curve even when it is straight, as here.
Notice the axes: price up the side, quantity along the bottom. In mathematics, the thing you choose usually goes along the bottom. Economics does it the other way, a habit from Alfred Marshall's diagrams of 1890 that examiners still expect.
The law of demand
Leila's list falls as the price rises. Almost every demand list ever measured does the same, so economists call the pattern a law.
Other things being equal, when the price of a good rises, the quantity demanded falls. When the price falls, the quantity demanded rises.
The first four words matter. "Other things being equal" means that only the price changes: not people's incomes, not the weather, not the price of anything else. Economists often write this in Latin, ceteris paribus. The law tells you the effect of the price alone.
Why does it hold so well? There are four reasons, and they work together.
- 1. Some buyers leave. A higher price passes some buyers' highest price, as at Leila's stall.
- 2. Each buyer buys fewer. Your first bubble tea of the week is worth a lot to you. A fourth is worth very little. So you have a lower highest price for each extra cup. When the price rises, the cups worth only a little are no longer worth buying.
- 3. Buyers switch to something else. When bubble tea costs more and juice does not, juice now looks like better value. Some buyers switch. Economists call this the substitution effect.
- 4. Money does not go as far. Suppose you spend $6 a week on bubble tea. At $3 a cup, that buys two. At $6 a cup, the same money buys one. You are a little poorer in what your money can buy, so you buy less. Economists call this the income effect.
That is it. That is the whole idea. A higher price makes some buyers leave, makes others buy less, and makes everyone compare the good with what else the money could buy: its opportunity cost.
Quantity demanded changes, demand does not
Now the most important pair of words in this topic. When the price of juice rises from $2.00 to $3.00, what happens?
The demand curve does not move: the students and their highest prices are the same. The point simply moves along the curve, from 15 cups to 9 cups. The quantity demanded falls. Demand, the whole list, has not changed. Economists call this a movement along the demand curve. Some books call a fall in quantity demanded a contraction, and a rise an extension.
So "the price went up, so demand fell" is wrong in economics. The correct sentence is "the price went up, so the quantity demanded fell". The difference matters, as the next question shows.
In February 2020, as the coronavirus spread, the World Health Organization (WHO) said that prices of protective equipment such as masks were up to 20 times higher than normal. What do you think happened to the amount people were trying to buy?
This box explains what happened to masks in early 2020, and why it does not break the law of demand.
On 7 February 2020, the WHO said that demand for protective equipment such as masks was up to 100 times higher than normal, while prices were up to 20 times higher. Prices and the amount people wanted both rose. This does not break the law of demand, because other things were not equal. Fear of the virus made people want far more masks at every price. The law of demand looks at a change in price alone. A change in anything else that affects buyers is a different event, and the next lecture shows how to draw it.
So when a price and a quantity both rise, the law of demand has not failed. Something other than the price has changed. (Source: WHO Director-General's opening remarks at the media briefing, 7 February 2020.)
Leila raises her price from $2.00 to $3.00, and sales fall from 15 to 9 cups a day. Her friend says: "Six students must have stopped liking juice." Is the friend right?
Show the answer
No. Nobody's taste changed. Every student still values a cup exactly as before. The six students who stopped buying are the ones whose highest price is $2.00 or $2.50. At $3.00, a cup is worth less to them than the money. If Leila went back to $2.00, all six would buy again. The buyers are the same; only the price has changed.
Adding buyers together: market demand
Leila's students each bought one cup or none. Most buyers are more flexible. A market's demand list adds up all its buyers' lists, price by price.
In an invented town, a bubble tea shop has three regular customers: Arjun, Hana and Kofi. Here is how many cups each would buy per week at four prices.
| Price ($) | Arjun | Hana | Kofi | Market |
|---|---|---|---|---|
| 2 | 3 | 4 | 2 | 9 |
| 3 | 2 | 3 | 1 | 6 |
| 4 | 1 | 2 | 1 | 4 |
| 5 | 0 | 1 | 0 | 1 |
Think first. Do you add the prices or the quantities?
The quantities, at the same price. At $3, the shop sells cups a week. Never add prices: all three customers face the same one.
Between $4 and $5, Arjun and Kofi leave the market, and Hana stays but buys fewer. Two of the reasons above appear in one row.
Check. Each column falls as the price rises, so their total must fall too. ✓ 9, 6, 4, 1 falls. ✓
In an invented school, a canteen stall sells noodle soup. At $2.50 a bowl, about 80 students buy it each day. The stall tries $3.00 and sells 55. At $3.50 it sells 30, and at $4.00 only 10.
Think first. Does this mean the students dislike the soup at $4.00? And what happens to the money the stall takes?
The soup tastes the same at every price. What changes is the comparison: at $4.00, more students decide that the rice stall, or food from home, is better value. This is the substitution effect.
| Price ($) | Bowls per day | Money taken ($ per day) |
|---|---|---|
| 2.50 | 80 | 200 |
| 3.00 | 55 | 165 |
| 3.50 | 30 | 105 |
| 4.00 | 10 | 40 |
Each price rise loses so many buyers that the stall takes less money, not more, because good alternatives were close by. How strongly buyers react is measured in a later lecture.
Check. , , , . ✓
A real case: when a free bag got a price
The situation. Until 2015, most shops in England gave away thin plastic carrier bags for free. In 2014, the seven main supermarket chains handed out about 7.6 billion, about 140 for every person in England.
The policy. From 5 October 2015, every large shop in England (250 or more employees) had to charge at least 5p (five pence) for each single-use plastic bag. The price of a bag went from zero to 5p. From 21 May 2021, the charge rose to 10p and was extended to all shops.
The prediction. The law of demand predicts a fall in the quantity of bags demanded: a movement along the demand curve. Bags have a very close substitute, a bag you already own, so the fall should be large even for a small price.
What happened. Single-use bags sold by the seven main retailers in England:
| Period | Charge per bag | Bags |
|---|---|---|
| 2014 (full year) | none | about 7.6 billion |
| Oct 2015 to Apr 2016 (6 months) | 5p | about 0.6 billion |
| Apr 2016 to Apr 2017 (1 year) | 5p | about 1.3 billion |
| Apr 2022 to Apr 2023 (1 year) | 10p | about 133 million |
The government reported a fall of 83% in the first full year, and of more than 98% by 2022 to 2023. (Sources: UK Department for Environment, Food and Rural Affairs (Defra), "Single-use plastic carrier bags charge: data in England" for 2015 to 2016 and 2016 to 2017, and press release, 31 July 2023; the 2014 figure is from the Waste and Resources Action Programme (WRAP).)
Verdict. The prediction came true, and the size of the fall is striking. 5p is tiny compared with a week's shopping. Yet most shoppers stopped buying bags, because a new bag was worth less than 5p to them once they could bring their own. Two cautions are fair. First, the figures count only single-use bags from the main retailers. Some shoppers switched to thicker "bags for life": environmental groups reported that sales of these rose by about 26% between 2017 and 2019 (Greenpeace and the Environmental Investigation Agency, as reported by edie, 2021). That is the substitution effect too, and not all of it helped the environment. Second, other things were not perfectly equal: attention to plastic waste was growing over the same years. Still, a fall this large, starting the month the charge began, is very strong evidence for the law of demand.
Are there any exceptions?
Could a higher price ever make people buy more, other things being equal? Textbooks name two possible kinds of good.
The first is named after Thorstein Veblen, who wrote in 1899 about people buying expensive things to show their wealth. For a few luxury goods, the high price may be part of what the buyer wants. The second is named after the economist Robert Giffen. A very poor family that lives mostly on one cheap food may buy more of it when it gets dearer, because it can no longer afford anything better. Clear evidence of this was found only in 2008, for rice among very poor households in Hunan, China (R. Jensen and N. Miller, American Economic Review, 2008).
Both cases need unusual conditions. For the goods you buy every day, the law of demand holds.
Three traps
A change in a good's own price changes the quantity demanded. It moves the point along the demand curve. Demand, the whole list, has not changed. Write "the quantity demanded fell" and "a movement along the demand curve".
Demand counts only buyers who are willing and able to pay. And every quantity needs a period: 300 cups per day is a very different market from 300 cups per year. A demand schedule without "per day" or "per week" is incomplete.
On a demand diagram, price goes up the side and quantity goes along the bottom. Label both axes, with units and the time period: "Price ($)" and "Quantity (cups per day)". If you swap them, your diagram no longer matches the one every reader expects, and the slope looks wrong.
Work each one on paper first. Open a hint only when you are stuck.
-
Which of these describe demand in the economic sense? Explain each. (a) Sipho would love a $900 bicycle, but he has $50 and no way to borrow. (b) Ana buys two loaves of bread a week at $1.50 each. (c) A report says: "The demand for rice in the town is 500 kg."
Hint 1
Check each case against the three parts of the definition.
Hint 2
(a) Is Sipho able to pay? (c) Which two things are missing from the report?
Full answer
(a) Not demand. Sipho is willing but not able to pay $900, so he is not part of the demand for that bicycle. (b) Yes. Ana is willing and able, there is a price and a time period: a quantity demanded of 2 loaves per week at $1.50. (c) Incomplete. It gives one quantity, with no price and no time period. Demand is a list of quantities at different prices, each "per" some period. Check: only (b) has all three parts. ✓
-
At a beach on a hot day, 20 people might buy one ice lolly each. Their highest prices are: $3.00 (2 people), $2.50 (3 people), $2.00 (5 people), $1.50 (6 people) and $1.00 (4 people). (a) Write the demand schedule for prices of $3.00, $2.50, $2.00, $1.50, $1.00 and $0.50. (b) How many people stop buying when the price rises from $1.50 to $2.00?
Hint 1
At each price, count everyone whose highest price is that price or more.
Hint 2
At $2.50, the buyers are those who said $3.00 or $2.50: .
Full answer
(a) $3.00: 2. $2.50: . $2.00: . $1.50: . $1.00: . $0.50: still 20, because nobody has a highest price below $1.00. (b) From 16 to 10: the 6 people whose highest price is $1.50 stop buying. Check: the quantities never rise as the price rises. ✓ The quantity stops growing at $1.00, because all 20 people are already buying. ✓
-
A school canteen sells sandwiches to students and to teachers. Students would buy 40 a day at $1, 30 at $2 and 20 at $3. Teachers would buy 10 a day at $1, 8 at $2 and 6 at $3. (a) Write the market demand schedule. (b) The price rises from $2 to $3. Describe the change in two correct economic phrases.
Hint 1
Add the quantities at the same price.
Hint 2
Which changed: the price of sandwiches, or something else? Use the words "quantity demanded" and "along".
Full answer
(a) $1: . $2: . $3: sandwiches per day. (b) The quantity demanded falls from 38 to 26, a fall of 12 sandwiches per day. This is a movement along the demand curve (a contraction). Demand itself has not changed. Check: each group buys fewer at $3, so the total must fall. ✓
-
A stretch. In an invented town, a shop gave away about 1 000 plastic bags a day. Then the town made every shop charge 10 cents a bag, and the shop's sales fell to 150 bags a day. (a) By what percentage did the quantity fall? (b) Give two reasons, from this lecture, why the fall was so large for such a small price. (c) The town council now wants to cut bags to 50 a day. Can the law of demand alone tell them what charge to set?
Hint 1
(a) Percentage fall = fall ÷ original × 100. (b) Think about each shopper's highest price for a bag, and about what else they could use.
Hint 2
(c) The law tells you the direction of the change. What does it not tell you?
Full answer
(a) The fall is bags, so . (b) First, most shoppers' highest price for a bag was very low, below 10 cents, so even a small charge passed it. Second, there is a very close substitute: a bag they already own. This makes the substitution effect strong. (c) No. The law of demand says that a higher charge will reduce the quantity further. It does not say by how much. To choose the charge, the council needs to measure how strongly shoppers respond. One way is to try a charge and count, as England did when it raised its charge from 5p to 10p. Check: 150 is 15% of 1 000, and . ✓
A price is not only money. Anything you must give up to get a good works like a price: time in a queue, a long walk, effort. A free water fountain on a far floor is used less than one beside your desk, because the walk is part of its price. This is opportunity cost again: the true cost of a choice is what you give up for it.
So the law of demand is really about the whole cost to the buyer. When that cost rises, in money, time or effort, people choose a little less. That is why a 5p charge worked: a bag from home cost almost nothing, so the comparison changed for millions of people at once.
But many other things affect buyers too: their incomes, their tastes, the prices of other goods. The masks showed what happens when one of these changes. The next lecture shows how such changes move the whole demand curve.
- Demand is the quantity of a good that buyers are willing and able to buy at each possible price, in a given period of time.
- A demand schedule can be built by counting, at each price, the buyers whose highest price is at least that price.
- The law of demand says that, other things being equal (ceteris paribus), a higher price means a lower quantity demanded.
- The demand curve slopes down because some buyers leave, each buyer buys fewer units, buyers switch to substitutes, and their money buys less.
- A change in a good's own price is a movement along the demand curve and changes the quantity demanded, not demand.
- Market demand is found by adding every buyer's quantity at the same price.