58 ❯ Step 4. Review the Knowledge You Need to Score High
The values in Table 6.2 reflect the law of demand: Holding all else equal, when the price
of a cup of lemonade rises, consumers decrease their quantity demanded for lemonade. It is often
quite useful to convert a demand schedule like the one above into a graphical representation,
the demand curve (Figure 6.1).QuantityPrice $1.00^D 11.25^40 60Figure 6.1Quantity Demanded versus Demand
The law of demand predicts a downward (or negative) sloping demand curve (Figure 6.1).
If the price moves from $1 to $1.25, and all other factors are held constant, we observe
a decrease in the quantity demanded from 60 to 40 cups. It is important to place special
emphasis on “quantity demanded.” If the price of the good changes and all other factors
remain constant, the demand curve is held constant and we simply observe the consumer
moving along the fixed demand curve. If one of the external factors change, the entire
demand curve shifts to the left or right.Determinants of Demand
So, what are all of these factors that we insist on holding constant? These determinants of
demand influence both the willingness and ability of the consumer to purchase units of the
good or service. In addition to the price of the product itself, there are a number of variables
that account for the total demand for a good like lemonade:• Consumer income.
• The price of a substitute good such as iced tea.
• The price of a complementary good such as a Popsicle.
• Consumer tastes and preferences for lemonade.
• Consumer expectations about future prices of lemonade.
• Number of buyers in the market for lemonade.• Consumer Income
Demand represents the consumer’s willingness and ability to pay for a good. Income
is a major factor in that “ability” to pay component. For most goods, when income
increases, demand for the good increases. Thus, for these normal goods, increased
income results in a graphical rightward shift in the entire demand curve. There are otherTIPKEY IDEA