Demand, as we have seen, is a relationship between the price of a good and the quantity of units of that good demanded by consumers. In particular, there seems to be a consistent pattern to this relationship: at higher prices, the quantity demanded is lower, while at lower prices, the quantity demanded is higher. This pattern is formalized as the {Law of Demand}:
\begin{equation*}
\textbf{Law of Demand}\text{ : as } P\uparrow\text{ , } Q_D\downarrow\text{ ; as } P\downarrow\text{ , } Q_D\uparrow
\end{equation*}
The Law of Demand is not entirely universal 1 , but it does seem to confirm some intuition: consumers generally wish to buy fewer units of a good or service as the price of that good or service increases.
What about the influence of those demand parameters, like income, consumer preferences, and prices of related goods? A change in one of these parameters will shift the demand curve to the right (an increase in demand) or to the left (a decrease in demand) depending on the type of change. 2 :
Figure1.3.1.The movement to \(D_2\) represents an increase in demand, while the movement to \(D_3\) represents a decrease in demand.
Consumer income: if the good is a normal good, then an increase in income leads to an increase in demand, while a decrease in income leads to a decrease in demand; if the good is an inferior good, then an increase in income leads to a decrease in demand, while a decrease in income leads to an increase demand.
Consumer preferences: if a change in consumer preferences improves the desirability of a good (such as the good becomes more popular or more attractive to consumers), this change leads to an increase in demand; if a good becomes less desirable, this change leads to a decrease in demand.
Prices of related goods: an increase in the price of a substitute good leads to an increase in demand, while a decrease in the price of a substitute good leads to a decrease in demand; an increase in the price of a complement good leads to a decrease in demand, while a decrease in the price of a complement good leads to an increase in demand.
The number of buyers: an increase in the number of buyers leads to an increase in demand, while a decrease in the number of buyers leads to a decrease in demand. This result can be seen directly in our analysis of aggregating demand: demand curves for additional consumers will lie farther to the right as more units are demanded at the same prices.
To look at a simple, concrete example, consider the demand function above \(Q_D = 200 - 2P + I\text{.}\) First, with a fixed income \(I = 100\text{,}\) we can compute that at \(P = 20\text{,}\)\(Q_D = 260\) and at \(P= 50\text{,}\)\(Q_D = 200\text{.}\) With a constant parameter (\(I = 100\)), the change in price represents a movement along the demand curve: In fact, at \(I = 100\text{,}\) this demand curve is
Figure1.3.2.Movement along the demand curve at \(I = 100\text{.}\)
Now consider the quantity demanded at a price of 20 when income increases from 100 to 150. When the income parameter increases, \(Q_D\)even while price remains the same: from 260 to 310! In fact, regardless of the exact price, an income increase will lead to higher quantity demanded provided the price remains constant. Since this holds for every price, the increase in income leads to a demand increase, where the entire demand curve shifts to the right. The new demand curve is
