Demand Curves (Cambridge (CIE) A Level Economics): Revision Note

An introduction to demand

• Demand is the amount of a good or service that a consumer is willing and able to purchase at a given price in a given time period

  • Effective demand is demand supported by the necessary purchasing power (the ability to pay)

  • If a consumer is willing to purchase a good, but cannot afford to, it is not effective demand

• A demand curve is a graphical representation of the price and quantity demanded (QD) by consumers

  • If the data were plotted, it would be an actual curve.  Economists, however, use straight lines so as to make analysis easier

• The law of demand states that there is an inverse relationship between price and quantity demanded (QD), ceteris paribus

  • When the price rises, the QD falls

  • When the price falls, the QD rises

Individual and market demand

• Market demand is the combination of all the individual demand for a good or service

  • It is calculated by adding up the individual demand at each price level  

The Monthly Market Demand for Newspapers in a Small Village

• Individual and market demand can also be represented graphically

Market demand for children's swimwear 

Diagram analysis

• A shop sells both boys' and girls' swimwear.

• In July, at a price of $10, the demand for boys' swimwear is 500 units and girls' is 400 units

• At a price of $10, the shop's market demand during July is 900 units

Movements along the demand curve

• If price is the only factor that changes (ceteris paribus), there will be a change in the quantity demanded (QD)

  • This change is shown by a movement along the demand curve

Movement along the demand curve 

Diagram analysis

• An increase in price from £10 to £15 leads to a movement up the demand curve from point A to B

  • Due to the increase in price, the QD has fallen from 10 to 7 units

  • This movement is called a contraction in QD

• A decrease in price from £10 to £5 leads to a movement down the demand curve from point A to point C

  • Due to the decrease in price, the QD has increased from 10 to 15 units

  • This movement is called an extension in QD

The determinants of demand

• There are numerous factors that will change the demand for a good or service, irrespective of the price level

• Collectively, these factors are called the determinants of demand and include

  • Changes in real income

  • Changes in tastes/preferences/fashion/trends

  • Advertising and branding

  • Changes in the price of related goods (substitutes and complements)

  • Changes in the population size and structure

  • Future price expectations

Shifts of the entire demand curve

• Changes to each of the determinants of demand shift the entire demand curve (as opposed to a movement along the demand curve)

• For example, if a firm increases their Instagram advertising, there will be an increase in demand as more consumers become aware of the product

  • This is a shift in demand from D to D₁. The price remains unchanged at £7 but the demand has increased from 15 to 25 units

Illustrating changes to the determinants of demand

1. A change in real income

• Real Income determines how many goods/services can be enjoyed by consumers

• In most cases, there is a direct relationship between income and demand for goods and services 

• If income increases

  • Demand increases and shifts right (D→D₁)

• If income decreases

  • Demand decreases and shifts left (D→D₂)

2. Change in consumer tastes and preferences

• If goods and services become more fashionable, then demand for them increases

• There is a direct relationship between changes in consumer preferences and demand

• If preference for a product increase

  • Demand increases and shifts right (D→D₁)

• If preference for a product decrease

  • Demand decreases and shifts left (D→D₂)

3. Improved advertising and branding

• If more money is spent on advertising or branding, then demand for goods and services will increase as more consumers become aware of the product

• There is a direct relationship between branding or advertising and demand

• If advertising or brand awareness of a product increases

  • Demand increases and shifts right (D→D₁)

• If advertising or brand awareness of a product decreases

  • Demand decreases and shifts left (D→D₂)

4. Changes in the prices of substitute goods

• Changes in the price of substitute goods will influence the demand for a product/service

• There is a direct relationship between the price of good A and demand for good B

  • For example, the price of a Sony 60" TV increases so the demand for LG 60" TV increases

• If the price of good A increases

  • Demand for good B increases and shifts right (D→D₁)

• If the price of good A decreases

  • Demand for good B decreases and shifts left (D→D₂)

5. Changes in the prices of complementary goods

• Changes in the price of complementary goods will influence the demand for a product or service

• There is an inverse relationship between the price of good A and demand for good B

  • For example, the price of printer ink increases so the demand for ink printers decreases

• If the price of good A increases

  • Demand for good B decreases and shifts left (D→D₂)

• If the price of good A decreases

  • Demand for good B increases and shifts right (D→D₁)

6. Changes in population size or distribution

• If the population size of a country changes over time, then demand for goods and services will also change

• There is a direct relationship between the changes in population size and demand

• Demand will also change if there is a change to the age distribution in a country, as different ages demand different goods and services

  • For example, an ageing population will buy more hearing aids

• If the population increases

  • Demand increases and shifts right (D→D₁)

• If the population decreases

  • Demand decreases and shifts left (D→D₂)