Demand and the Law of Demand

Picture coffee at $4 a cup. You buy one a day. The price drops to $2, and suddenly you're buying one in the morning and one in the afternoon. You weren't unhappy at $4, but $2 makes coffee a better deal relative to everything else you could spend that money on. That's the law of demand: price and quantity demanded move in opposite directions, holding everything else about the world constant.

Two forces drive this. The substitution effect: when coffee gets cheaper, it looks more attractive next to tea and soda, so you swap toward it. The income effect: a lower price stretches your existing money further, acting like a small raise in your purchasing power, so you buy more of lots of things, coffee included. Both effects push the same direction for an ordinary good, which is why the demand curve for coffee slopes downward — lower price, higher quantity demanded.

This matters because it separates two things that look similar but aren't. A change in the good's own price slides you along a fixed demand curve — that's a change in quantity demanded. A change in something else — income, tastes, the price of a related good, expectations — shifts the entire curve left or right at every price — that's a change in demand. Keeping these straight sets up everything that follows: supply behaves the same way in reverse, and the two curves together pin down where a market settles.