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1. Price.

Say I own a rice shop. My shop is infamous, because when serving people, I carefully count the rice, grain by grain, to determine a total price. You, because you are a crazy person, decide to attend my restaurant.

Before coming though, you have no idea what the price of each grain of rice is. In your car, you decide that if I charge 3 cents a grain, you’ll buy 400 grains of rice. If I charge 2 cents, you’ll buy 500 grains of rice. If I charge 1 cent, you’ll buy 600 grains of rice. You graph it.

You, my friend, just single-handedly discovered The Law of Demand. Here, let me put it into words for you: for any given product, a lower price results in more quantity demanded [and vice-versa]. You are willing to buy more rice, if it costs you 1 cent a grain, than if it costs you 3 cents.

2. People will only buy if the price is worth it.

Did you calculate the total price of rice for the three different scenarios … without my permission? If so, you’re a rebel and I like you.

But just in case you’re not a rebel, here is a list of total prices:

    -At 3 cents, you’ll buy 400 grains, so you’ll spend 12 dollars.
    -At 2 cents, you’ll buy 500 grains, so you’ll spend 10 dollars.
    -At 1 cent, you’ll buy 600 grains, so you’ll spend 6 dollars.

Well look at that. When it’s 3 cents, you are willing to spend a whopping 12 dollars. But when it’s 1 cent, you spend only six dollars.

At a penny, why aren’t you buying more rice, even though you can afford it? Is it because you’re a cheapskate like me? Maybe.

But mostly, it’s because your desire for rice is finite. When you’re hungry, you’re willing to pay good money for the first 400 grains of rice. But knowing you’ll be satisfied, you rather pay less money for an additional 400.

Because of our diminishing desires, the more units we have of something, the less we value each additional unit. This is called The Law of Diminishing Marginal Utility.

3. Preference.

A demand curve shows a negative relationship between price and quantity demanded, and it takes diminishing desire into account. Simple enough, right?

Here’s one important thing to keep in mind: demand can increase or decrease when there is a change in preference due to external factors. That is: at any given price, if something in your environment motivates you to want more rice, you will buy more rice. If something in your environment motivates you to want less rice, you will buy less rice. Here are graphical representations:

As these graphs have just shown, this change in preference is manifested by a shift in the demand curve. The next page will focus on the causes of these shifts.

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