Demand

The law of demand

Demand is the quantity of a good consumers are willing and able to buy at each price, over a period of time.

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Both words matter. Wanting a car is not demand; you must also be able to pay for it. Economists call this effective demand.

The law of demand says that as price rises, quantity demanded falls, and as price falls, quantity demanded rises, all other things being equal. So the demand curve slopes downwards.

Two reasons explain this:

• Income effect: when the price falls, your money goes further, so you can afford more.
• Substitution effect: when the price falls, the good becomes cheaper than its alternatives, so people switch to it.

Movement along versus a shift

This is the most commonly confused idea in the whole syllabus, and the rule has no exceptions:

The words are not decoration. Writing "a price fall increases demand" is marked wrong, a price fall increases quantity demanded. Get into the habit of using the two phrases correctly, because examiners check exactly this.

• Extension: a movement down the curve to a larger quantity when price falls.
• Contraction: a movement up the curve to a smaller quantity when price rises.

Causes of a change in demand (shifts)

Remember them as income, related goods, tastes, population, expectations:

• Income. For a normal good, higher income raises demand. For an inferior good, higher income lowers demand, because people trade up to something better, for example bus travel or value-brand food.
• Price of substitutes. A substitute is an alternative. If the price of tea rises, demand for coffee rises.
• Price of complements. A complement is used together with the good. If the price of petrol rises, demand for large cars falls.
• Tastes and fashion. Advertising, trends, and health information, demand for sugary drinks fell as health warnings spread.
• Population. More consumers means higher demand. Changes in the age structure matter too: an ageing population raises demand for healthcare.
• Expectations. If people expect prices to rise soon, demand rises now.
• Interest rates and credit. For things usually bought on credit, cars, houses, cheaper borrowing raises demand.

Government policy can also shift demand: a subsidy to consumers raises it, an indirect tax passed on as a higher price causes a movement along instead.

Individual and market demand

Market demand is the total of all individual demands at each price, you add up the quantities every consumer would buy. This is why a rise in population shifts market demand right even though no single person changed their behaviour.

Worked example

The price of petrol rises sharply. What happens in the market for large cars?

1. Petrol and large cars are complements, you need one to use the other
2. running a large car now costs more overall
3. at every price, fewer people are willing and able to buy one
4. the demand curve for large cars shifts left.

This is a shift, not a movement, because the price of cars has not changed, the price of petrol has, and that is a non-price factor for the car market.

Follow it through: with supply unchanged, a leftward shift in demand means the equilibrium price of large cars falls and the quantity sold falls too.

Common exam mistakes

• Saying a price change "increases demand", it changes quantity demanded.
• Shifting the curve when the good's own price changed.
• Confusing substitutes with complements.
• Confusing an inferior good with a cheap or poor-quality good. An inferior good is defined by what happens when income rises.
• Forgetting to label the axes as price and quantity.
• Not labelling the curves D1 and D2 when showing a shift.

Exam technique

Label the axes price and quantity, and always label the original curve D1 and the new one D2 with an arrow showing the direction.

State the cause as well as the direction: "demand shifts right because incomes have risen and this is a normal good" earns the explanation mark that "demand shifts right" does not.

If the question describes a change, decide first: is it the good's own price (movement along) or something else (shift)? That single decision usually determines whether the whole answer is right.

Building an answer

2 marks, "Define demand."

Demand is the quantity of a good consumers are willing and able to buy at each price over a given period of time.

"Willing and able" is the mark. Wanting a Ferrari is not demand; wanting one and being able to pay for it is.

4 marks, "Explain two factors that could increase the demand for bicycles."

A rise in the price of petrol makes driving more expensive. Bicycles are a substitute for short car journeys, so some drivers switch and demand for bicycles rises at every price.
A government campaign on the health benefits of cycling changes tastes, so more people want bicycles at any given price and demand shifts right.

Each factor needs the chain ending in demand shifts right, naming four factors without chains scores two.

6 marks, "Analyse the effect of a rise in incomes on the market for bus travel."

Bus travel is, for many consumers, an inferior good: as income rises they switch to cars or taxis.
Demand for bus travel therefore shifts left, not right.
At the old fare there is now excess supply, so operators cut fares or reduce services, and both price and quantity fall.
The result depends entirely on whether the good is normal or inferior, which is why identifying the type of good is the first step in the answer.

The determinants, and which way each shifts demand

A real case to quote

Second-hand clothing during the 2022 cost-of-living squeeze. Real incomes fell and demand for second-hand clothes rose sharply, the defining behaviour of an inferior good. It is a better example than the textbook's usual one because students can see it happening, and because it shows income affecting demand in the opposite direction to instinct.

Quick revision

• Demand = willing and able to buy at each price.
• The curve slopes down because of the income and substitution effects.
• Own price → movement along (quantity demanded). Anything else → shift (demand).
• Shifters: income, substitutes, complements, tastes, population, expectations, credit.
• Normal good: income up → demand up. Inferior good: income up → demand down.
• Substitutes move demand the same way as their price; complements the opposite way.

Check you have it

Question 1

The diagram shows the demand for and supply of plastic bags. The original equilibrium price is P.
How would the introduction of a unit tax on plastic bags be shown?

ADemand would shift to D2.BDemand would shift to D3.CSupply would shift to S2.DSupply would shift to S3.

Question 2

The diagram shows the market for beef in the US with the original equilibrium at X. What will be the new equilibrium position if incomes in the US rise?

APoint ABPoint BCPoint CDPoint D

Question 3

The diagram shows the demand for and supply of labour in an industry. The original equilibrium
is X.
A trade union then negotiates a wage rate of W.
R S T
What identifies the change in employment?

AORBOTCRSDRT

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