demand

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Demand

Demand is the amount of a good/service that a consumer is willing and able to purchase at a given price in a given time period
- 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 data were plotted, it would be an actual curve; however, economists simplify curves in their sketches into straight lines to make analysis easier

Movements along a demand curve

If price is the only factor that changes (ceteris paribus), there will be a change in the QD
- This change is shown by a movement along the demand curve

Graph shows demand curve with price on y-axis and quantity on x-axis. Points A, B, C show contraction and extension in quantity demanded. — **A demand curve showing a contraction in quantity demanded (QD) as prices increase and an extension in quantity demanded (QD) as prices decrease**

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 law of demand captures this fundamental relationship between price and QD
- It states that there is an inverse relationship between price and QD
  - When price rises, the QD falls
  - When prices fall, QD rises
This relationship partly explains why the demand curve is downward sloping

Conditions of Demand

Shifts of the entire demand curve

There are numerous factors that will change the demand for a good/service, irrespective of the price level. Collectively, these factors are called the conditions of demand
Changes to each of the conditions of demand shift the entire demand curve (as opposed to a movement along the demand curve)

Graph showing three downward-sloping demand curves (D, D1, D2) with price (£) on vertical axis and quantity on horizontal, indicating a shift right. — **A graph that shows how changes to any of the conditions of demand shifts the entire demand curve left or right, irrespective of the price level**

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

An Explanation of How Each of the Conditions of Demand Shifts the Entire Demand Curve at Every Price Level

Condition	Explanation	Condition	Shift	Condition	Shift
Changes in Real Income	Real Income determines how many goods/services can be enjoyed by consumers There is a direct relationship between income and demand for normal goods	Income Increases	D Shifts Right (D→D₁)	Income Decreases	D Shifts Left (D→D₂)
Changes in taste/fashion	If goods/services become more fashionable then demand for them increases There is a direct relationship between changes in taste/fashion and demand	Good becomes more fashionable	D Shifts Right (D→D₁)	Good becomes less fashionable	D Shifts Left (D→D₂)
Advertising/ branding	If more money is spent on advertising or branding, then demand for goods/services will increase as more consumers are aware of the product There is a direct relationship between branding/advertising and demand	Advertising Increases	D Shifts Right (D→D₁)	Advertising Decreases	D Shifts Left (D→D₂)
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	Price of Good A Increases	D for Good B Shifts Right (D→D₁)	Price of Good A Decreases	D for Good B Shifts Left (D→D₂)
Changes in the prices of complementary goods	Changes in the price of complementary goods will influence the demand for a product/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	Price of Good A Increases	D for Good B Shifts Left (D→D₂)	Price of Good A Decreases	D for Good B Shifts Right (D→D₁)
Changes in population size/distribution	If the population size of a country changes over time, then the demand for goods/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/services e.g an ageing population will buy more hearing aids	Population Increases	D Shifts Right (D→D₁)	Population Decreases	D Shifts Left (D→D₂)

Examiner Tips and Tricks

The difference between a movement along the demand curve and a shift in demand is essential to understand. You will be repeatedly examined on this and it is important that you use the correct language to show that you understand the difference between a change in quantity demanded and a change in demand.

When price changes (ceteris paribus), there is a movement along the demand curve resulting in a change to quantity demanded, which is a contraction or extension. When a condition of demand changes, there is a shift of the entire demand curve, resulting in a change to demand, which is an increase/rise or a decrease/fall.

Diminishing Marginal Utility

Marginal utility is the extra utility (satisfaction) gained from the consumption of an additional unit of a product
The utility gained from consuming the first unit is usually higher than the utility gained from consuming the next unit
- For example, a hungry consumer gains high utility from eating their first hamburger. They are still hungry and purchase a second hamburger but gain less satisfaction from eating it than they did from the first hamburger
To calculate total utility, the marginal utility of each unit consumed is added together
- This means that total utility keeps increasing even while marginal utility is decreasing
The Law of Diminishing Marginal Utility states that as additional products are consumed, the utility gained from the next unit is lower than the utility gained from the previous unit
The Law of Diminishing Marginal Utility helps to explain the reason why the demand curve is downward sloping
- When the first unit is purchased, the utility is high and consumers are willing to pay a higher price
- When subsequent units are purchased, each one offers less utility and the willingness of the consumer to pay the initial price decreases
- Lowering the price makes it a more attractive proposition for the consumer to keep consuming additional units
- This is one reason why firms offer discounts such as ‘50% off the second item.’

Economics_A-level_Edexcel