Demand: Law of Demand, Shifts vs Movements, TRIBE

A burrito shop raises its price from $8 to $10, and you buy fewer burritos. Did your demand for burritos go down? A lot of students say yes. On the AP exam, that's wrong. This is Module 2.1, Demand.

People respond to incentives: rewards or penalties for a choice. For buyers, price is a big one. Buyers also face constraints, or limits: income, time, and laws, like a minimum age to buy. Markets need property rights to work well: clear rules about who owns what. Without them, why pay for something you can't keep?

A demand schedule is a table of how much buyers are willing and able to buy at each price. Graph it, and you get the demand curve. Price goes on the vertical axis, quantity on the horizontal. Label both axes and the curve D: missing labels cost points. Quantity demanded is the amount buyers want at one price. The law of demand: when a good's own price rises, its quantity demanded falls, and the reverse, other things equal.

Why does the demand curve slope down? Three reasons. First, the substitution effect: when boba costs more, other drinks look cheaper by comparison, so you switch to them. Second, the income effect. A higher price makes the same money buy less, almost like a pay cut, so for most goods you buy less. Third, diminishing marginal utility. Each extra drink gives you less satisfaction than the one before. Say your first boba of the week is worth $7 to you, the second $5, and the third only $3.

That extra value is your marginal benefit. You buy one more only if that benefit beats the price. At $6, you buy 1, because only the first drink is worth more than $6. At $4, you buy 2. At $2, you buy all 3. Lower price, more drinks. That's why the demand curve is also called the marginal benefit curve.

So what just happened? One: each extra boba was worth less: $7, $5, $3. Two: you bought only drinks worth more than the price. Three: as the price fell from $6 to $2, you went from 1 drink to 3, tracing your demand curve.

When the good's own price changes, you slide along the same demand curve. That's a change in quantity demanded. When a demand shifter changes, like tastes or income, the whole curve shifts: a change in demand. Seller-side changes, like production costs, shift supply instead. Right is an increase, left is a decrease. On a graph, label the new curve D2 and draw an arrow. Exam trap number one: slide or shift? The burrito's price rose from $8 to $10, so you slid up along your curve.

On a graph, run dotted lines from each point to both axes, with $8 and $10 on the price axis. Your quantity demanded fell. Your demand did not change. A good's price today never shifts its own demand curve.

So what just happened with the burrito? One: only its own price changed, from $8 to $10. Two: you slid up along the same curve to fewer burritos. Three: that's a drop in quantity demanded, not in demand: the curve never moved.

What does shift demand? A memory trick is TRIBE: tastes, prices of related goods, income, number of buyers, and expectations. Tastes: if smoothies get trendy, smoothie demand shifts right. Shops then buy more bananas, so banana demand shifts right too, not banana supply.

So what just happened? One: tastes changed, so smoothie demand shifted right. Two: to make more smoothies, shops buy more bananas, and in the banana market they are the buyers. Three: banana demand shifted right too, and banana supply stayed put.

Related goods: substitutes replace each other, like boba and iced coffee. If iced coffee gets pricier, boba demand shifts right. Complements go together, like game consoles and video games. Cheaper consoles mean more consoles sold, so demand for games shifts right. Exam trap number two: boba's own price moves you along boba's curve, but iced coffee's price shifts boba's whole curve. And a cheaper complement means more demand, not less.

So what just happened? One: pricier iced coffee sent buyers to boba, so boba demand shifted right. Two: cheaper consoles meant more consoles sold, so game demand shifted right. Three: a related good's price shifts the curve; the good's own price only slides along it.

Income: for a normal good, like restaurant meals, more income shifts demand right. For an inferior good, more income shifts demand left. Say instant noodles are inferior for you: get a raise, and you buy fewer. Number of buyers: more buyers, like a new school opening next door, shift demand right. Expectations: if you expect the price to jump next week, you buy more now, so today's demand shifts right.

Last idea: market demand, the total of every buyer's demand. Worked example. You buy 1 drink at $6, 2 at $4, and 3 at $2. Your friend Leo buys 0 at $6, 1 at $4, and 2 at $2. The rule: at each price, add up every buyer's quantity. At $4, that's 2 plus 1, so the market wants 3 drinks per week. Do that at every price: 1 drink at $6, 3 at $4, 5 at $2. Plot those points, and that's the market demand curve.

That's horizontal summation: you add sideways, along the quantity axis. Exam trap number three: never add the prices. At $4, the price stays $4, not $8. Add only the quantities.

So what just happened? One: we took one price at a time. Two: at $4, you wanted 2 drinks and Leo wanted 1, so the market wanted 3 drinks. Three: doing that at every price gave the market demand curve, and we never added prices.

Quick refresher before the quiz. If the good's own price changes, slide along its curve: quantity demanded changes. If a TRIBE shifter changes, shift the whole curve: demand changes. Burrito price up: a slide. Smoothies trendy: a shift.

Quick check. Hot dogs and buns are complements. Hot dog prices fall. What happens to the demand for buns?

A) Quantity demanded of buns rises, a movement along the curve. B) Demand increases. C) Demand decreases. D) Nothing, since the price of buns didn't change.

The answer is B. People buy more hot dogs, and each needs a bun, so bun demand shifts right. The tempting wrong answer is A. The price that changed was the hot dog's, so the bun curve shifts.

Question two. Shoppers expect sneaker prices to fall next month. What happens to the demand for sneakers today?

A) Quantity demanded rises, a movement along the curve. B) Demand increases. C) Demand decreases. D) No change until the price falls.

The answer is C. Buyers wait for the lower price, so today's demand shifts left. The tempting wrong answer is A. Today's price hasn't changed, so there's no slide. The expected drop is a shifter, the E in TRIBE.

Recap. A good's own price moves you along its demand curve. The five TRIBE shifters move the whole curve. Market demand adds quantities sideways. And that burrito? Your quantity demanded fell, not your demand. Next: Module 2.2, Supply.