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AP Microeconomics: Demand (Law of Demand, Determinants, Normal vs Inferior Goods)

AP Microeconomics – Demand (Law of Demand, Determinants, Normal vs Inferior Goods)

What This Is

The law of demand states that, ceteris paribus, a higher price leads to a lower quantity demanded, and vice?versa. Understanding the determinants of demand (income, tastes, prices of related goods, expectations, number of buyers) lets you predict shifts of the demand curve. Distinguishing normal from inferior goods is a frequent FRQ topic because it ties consumer?income changes to real?world markets (e.g., premium coffee vs instant noodles). Mastery of these ideas is essential for multiple?choice items on elasticity and for FRQs that ask you to draw and explain a demand?curve shift.

Key Terms & Formulas

• Law of Demand – Inverse relationship between price (P) and quantity demanded (Qd) when all else is unchanged.
• Demand Curve – Graph with price on the vertical axis and quantity demanded on the horizontal axis; downward?sloping.
• Shift of Demand – Movement of the entire demand curve left (decrease) or right (increase) due to a determinant other than price.
• Income Effect – Change in Qd caused by a change in consumer income; part of the shift in demand.
• Substitution Effect – Change in Qd caused by a change in the relative price of a good versus its substitutes; reflected in movement along the curve.
• Normal Good – A good for which ?Income > 0-?Qd > 0 (demand rises when income rises).
• Inferior Good – A good for which ?Income > 0-?Qd < 0 (demand falls when income rises).
• Cross?Price Elasticity of Demand (XED) = %?Qd? / %?P? – Positive XED-substitutes; negative XED-complements.
• Price Elasticity of Demand (PED) = %?Qd / %?P – Measures responsiveness; |PED| > 1 = elastic, |PED| < 1 = inelastic.
• Market Demand Curve – Horizontal summation of all individual demand curves; still price on vertical, quantity on horizontal.
• Consumer Surplus – Area above the price line and below the demand curve, representing the net benefit to buyers.

Step?by?Step / Process Flow

1. Read the prompt carefully – Identify whether the question asks for a change in quantity demanded (movement along the curve) or a change in demand (curve shift).
2. List the relevant determinant(s) – Income, tastes, price of related goods, expectations, or number of buyers.
3. Draw the initial demand curve – Label axes (P vertical, Q horizontal) and sketch a downward?sloping line.
4. Apply the determinant:
5. If income rises and the good is normal, shift the curve right; if the good is inferior, shift left.
6. If the price of a substitute rises, shift the curve right (positive XED).
7. If the price of a complement falls, shift the curve right (negative XED).
8. Label the new curve (D?-D?) and indicate the direction of the shift with an arrow.
9. Explain the economic intuition – Connect the shift to the underlying determinant (e.g., “Higher consumer incomes increase demand for organic apples because they are a normal good”).

Common Mistakes

• Mistake: Confusing a movement along the demand curve with a shift of the demand curve.
  Correction: A price change causes a movement; any other determinant (income, tastes, etc.) shifts the whole curve.

• Mistake: labeling an inferior good as “low?quality” and assuming it always has a lower price.
  Correction: Inferior goods can be any good whose demand falls when income rises, regardless of price or quality (e.g., instant ramen).

• Mistake: Forgetting the sign of cross?price elasticity; thinking a price increase of a complement shifts demand right.
  Correction: A higher price of a complement decreases demand for the related good (negative XED).

• Mistake: Using the word “demand” when the question only asks for a “change in quantity demanded.”
  Correction: Keep the terminology precise—demand = curve; quantity demanded = point on the curve.

• Mistake: Drawing the demand curve upward?sloping when describing a normal good.
  Correction: The slope of the demand curve is always negative; “normal” refers to the direction of the shift when income changes, not the slope.

AP Exam Insights

• Multiple?Choice Focus: Items often test the direction of a demand shift (e.g., “If consumer expectations about future prices become more optimistic, the current demand curve will …”).
• FRQ Graphing Requirement: You’ll be asked to draw a demand curve, label the axes, and show a shift caused by a specific determinant (income rise, price of a substitute, etc.). Remember to label both curves (D? and D?) and indicate the shift arrow.
• Tricky Distinction: “A tax on sugary drinks” creates a price increase-movement along the demand curve, and a change in consumer preferences-possible shift; AP expects you to separate the two effects.
• Normal vs. Inferior: FRQs may give you a scenario like “During a recession, sales of brand?name cereal fall while sales of store?brand cereal rise.” You must identify which is normal and which is inferior.
• Cross?Price Elasticity: Expect a question that gives you the sign of XED and asks you to name the relationship (substitutes vs. complements).

Quick Check Questions

1. MC: If the price of coffee rises and the demand for tea increases, tea is a:
2. A) Complement
3. B) Inferior good
4. C) Substitute

5. D) Normal good
   Answer: C) Substitute – a positive cross?price elasticity means the two goods are substitutes.

6. FRQ?style: A rise in consumer income causes the demand curve for “premium headphones” to shift left. What does this tell you about premium headphones?
   Answer: They are an inferior good (demand falls when income rises).

7. MC: Which of the following would NOT shift the demand curve for gasoline?

8. A) A change in consumer tastes favoring electric cars
9. B) A rise in the price of diesel fuel (a substitute)
10. C) A decrease in the price of gasoline itself
11. D) An increase in the number of commuters
    Answer: C) A decrease in the price of gasoline itself – that causes a movement along the curve, not a shift.

Last?Minute Cram Sheet

• Demand curve: P (vertical) vs. Qd (horizontal); always slopes down.
• Law of Demand: ?P-?Qd; ?P-?Qd (ceteris paribus).
• Shift right = increase in demand; shift left = decrease in demand.
• Normal good: Income-? demand ?.
• Inferior good: Income-? demand ?.
• Cross?price elasticity (XED): Positive-substitutes; Negative-complements.
• Income effect + substitution effect = total change in Qd when price changes.
• Consumer surplus: Area above price, below demand curve.
• Market demand = horizontal sum of individual demands.
• “Supply increases” means the supply curve shifts right, not up; similarly, “demand increases” shifts the demand curve right.