Questions: Individual Demand Curves: Quantity Demanded vs. Price

Question 1

A consumer's income falls significantly. Assuming gasoline is a normal good, what happens to this consumer's demand curve for gasoline?

• A. The quantity demanded falls as the consumer moves up along the existing demand curve
• B. The entire demand curve shifts leftward — less gasoline is demanded at every price
• C. Nothing changes — income does not affect demand, only supply
• D. The demand curve shifts rightward because the consumer must now drive more to find cheaper options

Answer: (B)

Income is a non-price determinant of demand, so a change in income shifts the entire curve — a different quantity is demanded at *every* price, not just the current one. For a normal good, lower income means less demand at every price — a leftward shift. Option A is the classic confusion: a movement *along* the curve only occurs when the price of the good itself changes, not when income changes.

Question 2

The price of coffee rises sharply. A student writes in their notes: 'Demand for coffee decreased because the price went up.' What is wrong with this statement?

• A. Nothing — demand and quantity demanded mean the same thing, so the statement is correct
• B. A price increase causes a decrease in *quantity demanded* (movement along the curve), not a decrease in *demand* (shift of the curve)
• C. The statement should say demand *increased* because higher prices attract more buyers
• D. Demand can only decrease when a substitute good becomes cheaper, not when price rises

Answer: (B)

This is the most fundamental confusion in demand analysis. 'Demand' refers to the entire price-quantity relationship — the whole curve. A price change does not shift the curve; it moves you to a different point on it. The correct statement is: 'The quantity demanded of coffee decreased because the price rose.' Demand (the curve) would only decrease if a non-price factor changed — for example, if a health study caused consumers to want less coffee at every price.

Question 3

A consumer 'demands' a product simply by wanting it, regardless of whether they can afford it at the current price.

• T. True
• F. False

Answer: False

In economics, demand requires both willingness AND ability to purchase at a given price. Wanting a luxury car you cannot afford is not demand in the economic sense — it is just a preference. The demand curve captures only the quantities a consumer would actually buy at each price given their budget. This is why the demand curve represents *effective* purchasing decisions, not wish lists.

Question 4

The substitution effect and income effect both contribute to the downward slope of a normal good's demand curve.

• T. True
• F. False

Answer: True

When the price of a good rises, two things happen simultaneously. The substitution effect: the good is now more expensive relative to alternatives, so consumers substitute toward cheaper options. The income effect: the price increase reduces real purchasing power, so consumers can afford less of everything, including this good. For normal goods, both effects push quantity demanded downward as price rises, reinforcing the downward slope of the demand curve.

Question 5

Why does the demand curve slope downward? Explain using the two effects that drive this relationship.

Model answer: The demand curve slopes downward because of the substitution effect and the income effect. The substitution effect: as a good's price rises relative to alternatives, consumers have an incentive to buy substitutes instead. The income effect: a higher price reduces the consumer's real purchasing power — the same income buys less — so they cut back on consumption. For normal goods, both effects reduce quantity demanded when price rises, producing the downward slope.

Understanding why the curve slopes down — not just that it does — is essential for predicting what happens in unusual cases. Giffen goods are the famous exception: their income effect is so large and so negative that it overpowers the substitution effect, causing quantity demanded to rise with price. This only makes theoretical sense if you understand the two-force explanation, not just the rule.