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Understanding Demand
Students will be able to identify
characteristics of the law of demand.
Students will be able to define and/ or
identify the following terms:
Law of Demand
Substitution Effect
Income Effect
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Look at this demand curve.
What happens to quantity purchased
as prices rise?
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Why do we purchase more when a sale
occurs?
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The Law of Demand
• The law of demand states that consumers
buy more of a good when its price
decreases.
• Conversely, consumers buy less of a good
when its price increases.
• Consumers love low prices.
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It’s obvious, isn’t it? Consumers
love low prices.
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The Substitution Effect
• One reason that the law of demand exists
is the substitution effect.
• The substitution effect occurs when a
consumer reacts to an increase in a
good’s price by buying less of that good
and more of a similar yet cheaper good.
• When the price of orange juice rises,
consumers substitute cheaper apple juice
for orange juice.
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It really depends on the price, doesn’t it?
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The Income Effect
• The income effect is the change in
consumption resulting from a change in
income.
• In other words, when prices rise, your
money buys less.
• Higher prices reduce your purchasing
power.
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Lower prices allow consumers to
increase demand.
Lower prices increase consumers’
purchasing power.
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A demand schedule records the quantity
demanded at various prices.
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A demand schedule can easily be
converted to a demand curve.
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Economists love graphs because graphs
provide easy understanding of economic
concepts.
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If a picture is worth a thousand words,
a graph is worth even more.
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Questions for Reflection:
• State the law of demand.
• Provide an example of the substitution
effect.
• How does the income effect lead to the
law of demand?
• What is a demand schedule?
• What is a demand curve?
• Why do economists love graphs?
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