How many pounds of cotton, packaged in the form of blue jeans, do consumers around the world want to buy in a given year? You might at first think that we can answer this question by multiplying the number of pairs of blue jeans purchased around the world each day by the amount of cotton it takes to make a pair of jeans, and then multiplying by 365. But that’s not enough to answer the question because how many pairs of jeans—in other words, how many pounds of cotton—consumers want to buy depends on the price of cotton. When the price of cotton rises, as it did in 2011, some people will respond to the higher price of cotton clothing by buying fewer cotton garments or, perhaps, by switching completely to garments made from other materials, such as synthetics or linen. In general, the quantity of cotton clothing, or of any good or service that people want to buy (taking “want” to mean they are willing and able to buy it), depends on the price. The higher the price, the less of the good or service people want to purchase; alternatively, the lower the price, the more they want to purchase.

So the answer to the question “How many pounds of cotton do consumers want to buy?” depends on the price of a pound of cotton. If you don’t yet know what the price will be, you can start by making a table of how many pounds of cotton people would want to buy at a number of different prices. Such a table is known as a demand schedule. This, in turn, can be used to draw a demand curve, which is one of the key elements of the supply and demand model.

A demand schedule is a table that shows how much of a good or service consumers will want to buy at different prices. On the right side of Figure 5.1, we show a hypothetical demand schedule for cotton. It’s hypothetical in that it doesn’t use actual data on the world demand for cotton, and it assumes that all cotton is of equal quality.

According to the table, if cotton costs $1 a pound, consumers around the world will want to purchase 10 billion pounds of cotton over the course of a year. If the price is $1.25 a pound, they will want to buy only 8.9 billion pounds; if the price is only $0.75 a pound, they will want to buy 11.5 billion pounds; and so on. So the higher the price, the fewer pounds of cotton consumers will want to purchase. In other words, as the price rises, the quantity demanded of cotton—the actual amount consumers are willing and able to buy at some specific price—falls.

The graph in Figure 5.1 is a visual representation of the information in the table. The vertical axis shows the price of a pound of cotton and the horizontal axis shows the quantity of cotton in pounds. Each point on the graph corresponds to one of the entries in the table. The curve that connects these points is a demand curve, a graphical representation of the demand schedule, which is another way of showing the relationship between the quantity demanded and the price.

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Note that the demand curve shown in Figure 5.1 slopes downward. This reflects the general proposition that a higher price reduces the quantity demanded. For example, jeans-makers know they will sell fewer pairs of jeans when the price of jeans is higher, reflecting a $2 price per pound of cotton, compared to the number they will sell when the price of jeans is lower, reflecting a price of only $1 per pound of cotton. When the price of jeans is relatively high, some people buy pants less often, and some people buy pants made of wool, linen, or synthetics instead of cotton. In the real world, demand curves almost always slope downward. It is so likely that, all other things being equal, a higher price for a good will lead people to demand a smaller quantity of it, that economists are willing to call it a “law”—the law of demand.

Even though cotton prices were higher in 2013 than they had been in 2012, total world consumption of cotton was higher in 2013. How can we reconcile this fact with the law of demand, which says that a higher price reduces the quantity demanded, all other things being equal?

The answer lies in the crucial phrase all other things being equal. In this case, all other things weren’t equal: there were changes between 2012 and 2013 that increased the quantity of cotton demanded at any given price. For one thing, the world’s population increased by 77 million, and therefore the number of potential wearers of cotton clothing increased. In addition, higher incomes in countries like China allowed people to buy more clothing than before. These changes led to an increase in the quantity of cotton demanded at any given price. Figure 5.2 illustrates this phenomenon using the demand schedule and demand curve for cotton. (As before, the numbers in Figure 5.2 are hypothetical.)

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The table in Figure 5.2 shows two demand schedules. The first is a demand schedule for 2012, the same one shown in Figure 5.1. The second is a demand schedule for 2013. It differs from the 2012 demand schedule due to factors such as a larger population and higher incomes, factors that led to an increase in the quantity of cotton demanded at any given price. So at each price, the 2013 schedule shows a larger quantity demanded than the 2012 schedule. For example, the quantity of cotton consumers wanted to buy at a price of $1 per pound increased from 10 billion to 12 billion pounds per year, the quantity demanded at $1.25 per pound went from 8.9 billion to 10.7 billion pounds, and so on.

What is clear from this example is that the changes that occurred between 2012 and 2013 generated a new demand schedule, one in which the quantity demanded was greater at any given price than in the original demand schedule. The two curves in Figure 5.2 show the same information graphically. As you can see, the demand schedule for 2013 corresponds to a new demand curve, D₂, that is to the right of the demand curve for 2012, D₁. This change in demand shows the increase in the quantity demanded at any given price, represented by the shift in position of the original demand curve, D₁, to its new location at D₂.

It’s crucial to make the distinction between such changes in demand and movements along the demand curve, changes in the quantity demanded of a good that result from a change in that good’s price. Figure 5.3 illustrates the difference.

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The movement from point A to point B is a movement along the demand curve: the quantity demanded rises due to a fall in price as you move down D₁. Here, a fall in the price of cotton from $1.50 to $1 per pound generates a rise in the quantity demanded from 8.1 billion to 10 billion pounds per year. But the quantity demanded can also rise when the price is unchanged if there is an increase in demand—a rightward shift of the demand curve. This is illustrated in Figure 5.3 by the shift of the demand curve from D₁ to D₂. Holding the price constant at $1.50 a pound, the quantity demanded rises from 8.1 billion pounds at point A on D₁ to 9.7 billion pounds at point C on D₂.

When economists talk about a “change in demand,” saying “the demand for X increased” or “the demand for Y decreased,” they mean that the demand curve for X or Y shifted—not that the quantity demanded rose or fell because of a change in the price.

Figure 5.4 illustrates the two basic ways in which demand curves can shift. When economists talk about an “increase in demand,” they mean a rightward shift of the demand curve: at any given price, consumers demand a larger quantity of the good or service than before. This is shown by the rightward shift of the original demand curve D₁ to D₂. And when economists talk about a “decrease in demand,” they mean a leftward shift of the demand curve: at any given price, consumers demand a smaller quantity of the good or service than before. This is shown by the leftward shift of the original demand curve D₁ to D₃.

What caused the demand curve for cotton to shift? We have already mentioned two reasons: changes in population and income. If you think about it, you can come up with other things that would be likely to shift the demand curve for cotton. For example, suppose that the price of polyester rises. This will induce some people who previously bought polyester clothing to buy cotton clothing instead, increasing the demand for cotton.

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There are five principal factors that shift the demand curve for a good or service:

Although this is not an exhaustive list, it contains the five most important factors that can shift demand curves. So when we say that the quantity of a good or service demanded falls as its price rises, all other things being equal, we are in fact stating that the factors that shift demand are remaining unchanged. Let’s now explore, in more detail, how those factors shift the demand curve.

Changes in the Prices of Related Goods or Services While there’s nothing quite like a comfortable pair of all-cotton blue jeans, for some purposes khakis—typically made from polyester blends—aren’t a bad alternative. Khakis are what economists call a substitute for jeans. A pair of goods are substitutes if a rise in the price of one good (jeans) makes consumers more willing to buy the other good (polyester-blend khakis). Substitutes are usually goods that in some way serve a similar function: coffee and tea, muffins and doughnuts, train rides and airplane rides. A rise in the price of the alternative good induces some consumers to purchase the original good instead of it, shifting demand for the original good to the right.

But sometimes a fall in the price of one good makes consumers more willing to buy another good. Such pairs of goods are known as complements. Complements are usually goods that in some sense are consumed together: computers and software, cookies and milk, cars and gasoline. Because consumers like to consume a good and its complement together, a change in the price of one of the goods will affect the demand for its complement. In particular, when the price of one good rises, the demand for its complement decreases, shifting the demand curve for the complement to the left. So a rise in the price of cookies is likely to precipitate a leftward shift in the demand curve for milk, as people consume fewer snacks of cookies and milk. Likewise, when the price of one good falls, the quantity demanded of its complement rises, shifting the demand curve for the complement to the right. This means that if, for some reason, the price of cookies falls, we should see a rightward shift in the demand curve for milk, as people consume more cookies and more milk.

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Changes in Income When individuals have more income, they are normally more likely to purchase a good at any given price. For example, if a family’s income rises, it is more likely to take that summer trip to Disney World—and therefore also more likely to buy plane tickets. So a rise in consumer incomes will cause the demand curves for most goods to shift to the right.

Why do we say “most goods,” rather than “all goods”? Most goods are normal goods—the demand for them increases when consumer income rises. However, the demand for some products falls when income rises. Goods for which demand decreases when income rises are known as inferior goods. Usually an inferior good is one that is considered less desirable than more expensive alternatives—such as a bus ride versus a taxi ride. When they can afford to, people stop buying an inferior good and switch their consumption to the preferred, more expensive alternative. So when a good is inferior, a rise in income shifts the demand curve to the left. And, not surprisingly, a fall in income shifts the demand curve to the right.

One example of the distinction between normal and inferior goods that has drawn considerable attention in the business press is the difference between so-called casual-dining restaurants such as Applebee’s and Olive Garden and fast-food chains such as McDonald’s and KFC. When their incomes rise, Americans tend to eat out more at casual-dining restaurants. However, some of this increased dining out comes at the expense of fast-food venues—to some extent, people visit McDonald’s less once they can afford to move upscale. So casual dining is a normal good, while fast-food appears to be an inferior good.

Changes in Tastes Why do people want what they want? Fortunately, we don’t need to answer that question—we just need to acknowledge that people have certain preferences, or tastes, that determine what they choose to consume and that these tastes can change. Economists usually lump together changes in demand due to fads, beliefs, cultural shifts, and so on under the heading of changes in tastes, or preferences.

For example, once upon a time men wore hats. Up until around World War II, a respectable man wasn’t fully dressed unless he wore a dignified hat along with his suit. But the returning soldiers adopted a more informal style, perhaps due to the rigors of the war. And President Eisenhower, who had been supreme commander of Allied Forces before becoming president, often went hatless. After World War II, it was clear that the demand curve for hats had shifted leftward, reflecting a decrease in the demand for hats.

Economists have little to say about the forces that influence consumers’ tastes. (Marketers and advertisers, however, have plenty to say about them!) However, a change in tastes has a predictable impact on demand. When tastes change in favor of a good, more people want to buy it at any given price, so the demand curve shifts to the right. When tastes change against a good, fewer people want to buy it at any given price, so the demand curve shifts to the left.

Changes in Expectations When consumers have some choice about when to make a purchase, current demand for a good is often affected by expectations about its future price. For example, savvy shoppers often wait for seasonal sales—say, buying next year’s holiday gifts during the post-holiday markdowns. In this case, expectations of a future drop in price lead to a decrease in demand today. Alternatively, expectations of a future rise in price are likely to cause an increase in demand today. For example, if you heard that the price of jeans would increase next year, you might go out and buy an extra pair now.

Changes in expectations about future income can also lead to changes in demand. If you learned today that you would inherit a large sum of money sometime in the future, you might borrow some money today and increase your demand for certain goods. On the other hand, if you learned that you would earn less in the future than you thought, you might reduce your demand for some goods and save more money today.

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Changes in the Number of Consumers As we’ve already noted, one of the reasons for rising cotton demand between 2012 and 2013 was a growing world population. Because of population growth, overall demand for cotton would have risen even if the demand of each individual wearer of cotton clothing had remained unchanged.

Let’s introduce a new concept: the individual demand curve, which shows the relationship between quantity demanded and price for an individual consumer. For example, suppose that Darla is a consumer of cotton blue jeans; also suppose that all blue jeans are the same, so they sell for the same price. Panel (a) of Figure 5.5 shows how many pairs of jeans she will buy per year at any given price per pound. Then D_Darla is Darla’s individual demand curve.

The market demand curve shows how the combined quantity demanded by all consumers depends on the market price of that good. (Most of the time, when economists refer to the demand curve, they mean the market demand curve.) The market demand curve is the horizontal sum of the individual demand curves of all consumers in that market. To see what we mean by the term horizontal sum, assume for a moment that there are only two consumers of blue jeans, Darla and Dino. Dino’s individual demand curve, D_Dino, is shown in panel (b). Panel (c) shows the market demand curve. At any given price, the quantity demanded by the market is the sum of the quantities demanded by Darla and Dino. For example, at a price of $30 per pair, Darla demands 3 pairs of jeans per year and Dino demands 2 pairs per year. So the quantity demanded by the market is 5 pairs per year.

Clearly, the quantity demanded by the market at any given price is larger with Dino present than it would be if Darla were the only consumer. The quantity demanded at any given price would be even larger if we added a third consumer, then a fourth, and so on. So an increase in the number of consumers leads to an increase in demand.

For an overview of the factors that shift demand, see Table 5.1.

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