Demand vs Quantity Demanded

Sample Answer

Demand vs Quantity Demanded

• Demand refers to the full relationship between price and the quantity consumers are willing to purchase across all price levels.

• Quantity demanded is the specific amount consumers wish to purchase at a single price point, assuming all other factors remain unchanged.

Why the Demand Curve is Negatively Sloped

The inverse slope of the demand curve arises due to three main effects:

1. Substitution Effect: As price increases, consumers shift towards cheaper alternatives.

2. Income Effect: A higher price reduces real purchasing power, leading to lower consumption.

3. Diminishing Marginal Utility: Each additional unit of a good brings less satisfaction, prompting buyers to purchase more only when the price falls.

Supply vs Quantity Supplied

• Supply denotes the entire relationship between price and the quantity producers are willing to supply at various prices.

• Quantity supplied refers to the exact amount producers are ready to sell at a particular price, holding all else constant.

Why the Supply Curve is Positively Sloped

The upward slope of the supply curve is explained by:

1. Profit Incentives: Higher prices make additional production more profitable, prompting producers to increase output.

2. Rising Marginal Costs: As production expands, additional units become costlier, necessitating higher prices to maintain profitability.

Movement Along vs Shifts in Curves

• Movement along a curve occurs purely in response to changes in price.

• A shift in a curve results from non-price factors (such as income, technology, or policy changes), causing the entire demand or supply curve to move left or right.

Factors That Shift Demand Curves

Key non-price determinants include:

• Income changes (affecting normal vs inferior goods)

• Consumer preferences

• Prices of related goods (substitutes and complements)

• Future expectations (price, income)

• Demographic changes

Factors That Shift Supply Curves

Non-price influences on supply include:

• Input cost fluctuations

• Technological advancements

• Changes in input availability

• Government taxes and subsidies

• Regulatory changes

• Number of suppliers

• Future price expectations

Normal Goods: Substitution and Income Effects

For normal goods, a price reduction triggers both:

• Substitution Effect: Consumers buy more of the now cheaper good.

• Income Effect: Lower prices effectively increase purchasing power, leading to increased quantity demanded.
  Together, these effects underpin the typical downward slope of the demand curve.