2.1 - Demand

The definition and law of demand

Demand describes how buyers behave in a market by showing the link between different prices of a product and the amounts that consumers are prepared and able to buy over a set period, assuming other factors stay the same.

Markets act as systems that allow buyers and sellers to interact, deciding which products and services an economy produces and how limited resources are distributed.

The law of demand

The law of demand explains that there is an opposite relationship between a product's price and the quantity demanded over a period. If the price goes up, the quantity demanded drops because buyers are less willing or able to purchase as much. On the other hand, if the price falls, the quantity demanded rises. This rule holds true provided other influences remain unchanged.

Demand curves and market demand

A demand curve is a graph that displays the connection between a product's price and the quantity demanded during a specific timeframe. The vertical axis shows the price per unit (P), while the horizontal axis shows the quantity demanded per period (Q). Due to the opposite relationship between these, the curve slopes downwards from left to right, with a negative gradient. The diagram below shows a market demand curve, D. At a price of P1 buyers are prepared and able to purchase Q1 units per period, and if the price rises to P2 they buy only Q2 units, so the higher price goes with the smaller quantity demanded.

Individual and market demand curves

A demand curve can represent a single buyer's demand or the overall market. Market demand is found by summing the quantities each buyer would purchase at every price level. For instance, if one buyer demands six units at £2.50 and another demands four units at the same price, the market demand at £2.50 is ten units.

Non-price determinants of demand

Non-price determinants are elements besides the product's own price that influence demand. When these change, the whole demand curve moves: to the right for an increase in demand or to the left for a decrease.

Income changes

Normal goods:

• These are products where demand grows as buyers' incomes rise. In the diagram below, a rise in income shifts the demand curve rightwards from D1 to D2, so at every price per unit (P) buyers want a larger quantity per period (Q).

Inferior goods:

• These are products where demand falls as incomes increase, as buyers switch to better options. In the diagram below, the demand curve shifts leftwards from D1 to D2, so at every price per unit (P) buyers want a smaller quantity per period (Q).
• The classification can vary by context; a basic bicycle might be normal in a low-income area but inferior in a wealthier one where people prefer cars.

Prices of related goods

Substitute goods:

• These are items that fulfil similar needs, so buyers choose one instead of the other, like tea and coffee.
• If the price of one substitute increases, demand for the alternative rises, shifting its demand curve rightwards from D1 to D2, exactly as a rise in income does for a normal good.

Complement goods:

• These are items used together, such as smartphones and protective cases.
• If the price of one complement goes up, demand for the paired item drops, shifting its demand curve leftwards from D1 to D2, the same movement as for an inferior good when incomes rise.

Tastes and preferences

Demand rises when a product becomes more appealing due to influences like advertising, trends, peer behaviour, or health awareness, shifting the curve rightwards. Conversely, if tastes shift away from the product, demand falls, shifting the curve leftwards.

Expectations of future price changes

If buyers anticipate a price increase soon, they may buy more now, shifting demand rightwards. If they expect prices to drop later, they might delay purchases, shifting demand leftwards.

Number of consumers

An increase in the number of buyers in a market generally boosts demand, shifting the curve rightwards, while a decrease reduces demand, shifting it leftwards.

Movements along versus shifts in the demand curve

Changes in a product's price cause movements along the demand curve, altering the quantity demanded. In contrast, changes in non-price determinants cause the entire curve to shift, changing demand itself.

Movement along the curve (change in quantity demanded)

• This happens only when the product's price changes.
• A price rise leads to a contraction in quantity demanded (upward movement along the curve).
• A price fall leads to an extension in quantity demanded (downward movement along the curve).

Shift of the curve (change in demand)

• This occurs due to alterations in non-price factors.
• A rightward shift shows increased demand at every price.
• A leftward shift shows decreased demand at every price.