An Introduction to 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
o Effective demand is demand supported by the necessary purchasing power
(the ability to pay)
o 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
o 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 (all other variables remain constant).
o When the price rises, the QD falls
o When the price falls, the QD rises

Individual and Market Demand

• Market demand is the combination of all the individual demand for a good/service
o It is calculated by adding up the individual demand at each price level

The Monthly Market Demand for Newspapers in a Small Village

Customer 3 Customer 4 Market Demand

Customer 1 Customer 2

30 15 4 4 53
• Individual and market demand can also be represented graphically

Diagram: Market Demand for Children's Swimwear

Boys, girls and

total customer demand curves for children's swimwear in July
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 shops market demand during July is 900 units
Movements Along a Demand Curve
• If price is the only factor that changes (ceteris paribus), there will be a change in the
quantity demanded (QD)
o This change is shown by a movement along the demand curve

Diagram: Movement Along a Demand Curve

A demand curve shows 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
o Due to the increase in price, the QD has fallen from 10 to 7 units
o 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
o Due to the decrease in price, the QD has increased from 10 to 15 units
o This movement is called an extension in QD

The Conditions of Demand

• 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 and
include
o Changes in real income
o Changes in tastes/preferences
o Changes in the price of related goods (substitutes and complements)
o Changes in the number of consumers
o Future price expectations
• Changes to each of the conditions of demand, shift the entire demand curve (as opposed
to a movement along the demand curve)
Diagram: Shift of the Demand Curve

Changes
to any of the conditions of demand shift 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
o 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

How Changes to the Conditions of Demand Shift the Entire Demand Curve at
Every Price Level

Condition of Shift Impact Shift

Explanation Impact
Demand

• Real Income determines how many goods and services

can be purchased by consumers

• There is a direct relationship between income and

demand for goods/services D Increases D Decreases
Changes in real Income Income
Shifts Right Shifts Left
income Increases Decreases
• Normal goods have a positive relationship with (D→D1) (D→D2)
income, as income rises, demand rises, and vice versa

• Inferior goods have an inverse relationship with

income, as income rises, demand falls, and vice versa

• If goods/services become
more desirable, then demand for them increases
Good
D Increases Good D Decreases
Changes in • There is a direct relationship between changes becomes
Shifts Right becomes less Shifts Left
taste/preferences in taste/preferences and demand more
(D→D1) preferable (D→D2)
preferable
• Advertising or branding can change
tastes/preferences
 • Changes in the price of substitute goods will influence
the demand for a product/service D for D for
Changes in the
prices of Price of Good B Good B
• There is a direct relationship between the price of Price of Good
substitute goods Good A Increases Decreases
good A and demand for good B A Decreases
Increases Shifts Right Shifts Left
(Related goods) (D→D1) (D→D2)
• E.g. The price of a Sony 60" TV (good A) increases so
the demand for LG 60" TV (good B) increases

• Changes in the price of complementary goods will

Changes in the influence the demand for a product/service D for D for
prices of Price of Good B Good B
complementary • There is an inverse relationship between the price of Price of Good
Good A Decreases Increases
goods good A and demand for good B A Decreases
Increases Shifts Left Shifts Right
(Related goods) • For example, the price of printer ink (good A) increases (D→D2) (D→D1)
so the demand for ink printers (good B) decreases

• 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

Changes in the D Increases D Decreases
population size and demand Population Population
number of Shifts Right Shifts Left
Increases Decreases
consumers • Demand will also change if there is a change to the age (D→D1) (D→D2)
distribution in a country, as different ages demand
different goods and services, e.g an ageing population
will buy more hearing aids

• If consumers expects the price of a good/service

to increase in the future, they will purchase it now,
and demand will increase Expectations D Increases D Decreases
Future price Expectations
price will Shifts Right Shifts Left
expectations price will fall
• If consumers expects the price of a good/service rise (D→D1) (D
to decrease in the future, they will wait to purchase it
later, and demand will decrease