Demand | IGCSE Class 10 Economics Notes

This note covers demand in IGCSE Economics: the definition of demand, the relationship between price and quantity demanded, movements along the demand curve (extensions and contractions), the link between individual demand and market demand through aggregation, and the conditions of demand that cause the demand curve to shift (an increase or decrease in demand).

What is demand?

Demand in economics means more than simply wanting a good. A consumer may want a sports car but have no money to pay for it; such a wish is not demand.

Effective demand is the quantity of a good or service that consumers are willing and able to buy at a given price in a given period of time.

The two conditions, willingness and ability to pay, must both hold for demand to exist.

The quantity of a commodity that a consumer is willing to buy and is able to afford, given the price of the good, the prices of other goods, the consumer's income and the consumer's tastes and preferences, is called demand for the commodity.

Demand is always expressed for a particular price and over a particular time period, for example "2,000 ice-creams a week at $2 each," because the same good can be demanded in very different quantities at different prices.

Definition: demand. Demand is the quantity of a good or service that consumers are willing and able to purchase at a given price in a given time period.

Demand can be shown in two linked ways. A demand schedule is a table listing the quantity demanded of a good at a series of different prices, while a demand curve is the same information drawn as a diagram, with price on the vertical axis and quantity demanded on the horizontal axis.

How does price affect quantity demanded?

The relationship between the price of a good and the quantity of it that is demanded, with all other influences on demand held constant, is called the law of demand.

It states that there is a negative, or inverse, relationship between the price of a good and the quantity demanded of it: as price rises, quantity demanded falls, and as price falls, quantity demanded rises, other things being equal.

Definition: law of demand. Other things being equal, there is a negative relationship between the price of a commodity and the quantity demanded of it: when price rises, quantity demanded falls, and when price falls, quantity demanded rises.

This negative relationship is explained by diminishing marginal utility. Each additional unit of a good consumed adds less extra satisfaction than the unit before it, so a consumer is willing to pay less for each successive unit.

A consumer will therefore only buy more units of a good if its price falls, because the extra units are worth less to her than the earlier ones.

The phrase "quantity demanded" is important and precise. It refers to a single point on the demand curve, that is, the exact quantity bought at one particular price.

It is different from "demand", which refers to the whole relationship, that is, the whole curve or schedule showing quantity at every possible price.

Extensions and contractions in demand

When the price of a good changes and nothing else changes, the quantity demanded moves along the same, fixed demand curve. This is called a movement along the demand curve, and it has two directions:

• An extension of demand is a rise in the quantity demanded of a good caused by a fall in its price. On the diagram, this is shown by a movement down and to the right along the existing demand curve.
• A contraction of demand is a fall in the quantity demanded of a good caused by a rise in its price. On the diagram, this is shown by a movement up and to the left along the existing demand curve.

In both cases the demand curve itself does not move. Only the point on it changes, because only the price of the good itself has changed, while income, the prices of other goods and tastes remain the same.

Price is on the vertical axis and quantity demanded is on the horizontal axis. The demand curve, labelled D, slopes downward from left to right.

A fall in price from P₁ to P₂ moves the point of equilibrium down the curve from A to B, an extension of demand from Q₁ to Q₂.

A rise in price back from P₂ to P₁ moves the point back up the curve from B to A, a contraction of demand.

A straightforward way to remember this is that any movement caused only by a change in the good's own price stays on the same curve; a change caused by anything else moves the whole curve.

What is individual demand and market demand?

Individual demand is the quantity of a good that one particular consumer is willing and able to buy at each price. Different consumers have different incomes and tastes, so their individual demand curves for the same good can differ in both position and slope.

Market demand is the total quantity of a good that all consumers in a market, taken together, are willing and able to buy at each price.

The market demand for a good at a particular price is the sum of the individual demands of every consumer in that market at that price.

This relationship is called aggregation, because the individual demand curves are added together, quantity by quantity, at each price, to build the market demand curve.

Definition: market demand. Market demand is the total demand for a good or service from all the consumers in a market, found by adding together each consumer's individual demand at every price.

Graphically, the market demand curve is derived by adding the individual demand curves horizontally: at each price, the quantities demanded by each consumer are added across to give one point on the market curve, and this is repeated at every price to trace out the whole market demand curve.

Because quantities are added, the market demand curve lies further to the right than any single individual's demand curve, and it is normally flatter, since it reflects the combined responsiveness of many buyers rather than one.

Worked example 1. At a price of $3 per unit, Consumer A demands 7 units and Consumer B demands 18 units. There are only these two consumers in the market. Calculate the market demand at a price of $3.

Answer: Market demand = Consumer A's demand + Consumer B's demand = 7 + 18 = 25 units at a price of $3.

Worked example 2. A market has two consumers. Consumer A's demand function is dA(p) = 20 − p, and Consumer B's demand function is dB(p) = 30 − 2p, both valid for the price range where quantity demanded is positive. Find the market demand function.

Answer: Market demand = dA(p) + dB(p) = (20 − p) + (30 − 2p) = 50 − 3p, for any price up to $15 (above $15, Consumer B's demand is zero, so market demand equals Consumer A's demand alone, 20 − p). At a price of $5, for example, market demand = 50 − (3 × 5) = 50 − 15 = 35 units.

What are the conditions of demand?

The demand curve is drawn on the assumption that only the price of the good itself changes, while every other influence on demand is held constant. These other influences are called the conditions of demand.

When one of them changes, the whole demand curve shifts to a new position, rather than the quantity demanded simply moving along the same curve.

Definition: conditions of demand. The conditions of demand are the non-price factors, such as income, the prices of related goods and tastes, that are held constant when a demand curve is drawn and that cause the whole curve to shift when they change.

The main conditions of demand are as follows.

Income

For a normal good, demand moves in the same direction as the consumer's income: as income rises, demand increases, and as income falls, demand decreases.

For an inferior good, demand moves in the opposite direction to income: as income rises, demand for the inferior good falls, because consumers switch to better-quality alternatives, and as income falls, demand for the inferior good rises again.

A good can behave as a normal good at low levels of income and as an inferior good once income rises beyond a certain level.

Prices of related goods

Substitute goods are goods that can be used in place of one another, such as tea and coffee.

If the price of one substitute rises, consumers switch away from it towards the other, so demand for the other good rises; demand for a good therefore usually moves in the same direction as the price of its substitute.

Complementary goods are goods that are consumed together, such as tea and sugar. If the price of one complement rises, less of the pair is bought overall, so demand for the other good falls; demand for a good therefore usually moves in the opposite direction to the price of its complement.

Tastes and preferences

A favourable change in consumer tastes towards a good increases demand for it at every price, while an unfavourable change reduces demand for it at every price.

Seasonal changes in preference also shift demand, for example a greater liking for a good at a particular time of year, or new information that makes a good more or less attractive to buyers.

How does a shift in the demand curve differ from a movement along it?

An increase in demand is a rise in the quantity demanded of a good at every price, caused by a favourable change in one of the conditions of demand.

On the diagram, the whole demand curve shifts to the right, so that more is demanded at any given price than before.

A decrease in demand is a fall in the quantity demanded of a good at every price, caused by an unfavourable change in one of the conditions of demand.

On the diagram, the whole demand curve shifts to the left, so that less is demanded at any given price than before.

Price is on the vertical axis and quantity on the horizontal axis. The original demand curve D₀ is shown together with D₁ to its right and D₂ to its left.

A shift from D₀ to D₁ is an increase in demand, caused for example by a rise in income for a normal good, a rise in the price of a substitute, a fall in the price of a complement, or a favourable change in tastes.

A shift from D₀ to D₂ is a decrease in demand, caused by the opposite changes.

It is important not to confuse the two kinds of change. A change in the price of the good itself causes an extension or contraction, a movement along the same curve.

A change in anything else that affects demand, that is, a change in one of the conditions of demand, causes an increase or decrease in demand, a shift of the whole curve to a new position.

1. Identify what has changed: is it the price of the good itself, or something else such as income, the price of a related good or tastes?
2. If only the price of the good itself has changed, locate the new point on the same, unmoved demand curve: a lower price gives an extension, a higher price gives a contraction.
3. If a condition of demand has changed, redraw the whole demand curve in a new position: to the right for an increase in demand, to the left for a decrease in demand.
4. Check the direction of the shift against the type of good and the type of related good involved, for example a rise in income shifts a normal good's curve right but an inferior good's curve left.
5. State the quantity demanded at the relevant price on the new or existing curve to answer any question about the effect on the market.

Worked example 3. A consumer buys 15 units of a good at a price of $5 per unit.

The price falls to $3 per unit, and nothing else about the consumer's income, the prices of other goods or her tastes changes. As a result she now buys 20 units.

State whether this is a movement along the demand curve or a shift of the demand curve, and name the movement.

Answer: Only the price of the good itself has changed, so this is a movement along the same demand curve, not a shift. Since the price fell from $5 to $3 and the quantity demanded rose from 15 to 20 units, this is an extension of demand.

Worked example 4. At a price of $4, the demand for butter (a normal good) is 100 units. Consumer incomes then rise, and at the same price of $4, demand for butter rises to 130 units.

State whether this is a movement along the demand curve or a shift, and name the type of shift.

Answer: The price of butter stayed the same at $4 throughout, but the quantity demanded at that price rose from 100 to 130 units because incomes changed.

Since this change is caused by a condition of demand (income) rather than by the good's own price, the whole demand curve has shifted, and because quantity demanded at the same price has risen, this is an increase in demand.

Going beyond the syllabus

Economists sometimes note that very few goods behave as Giffen goods, where a rise in price is associated with a rise in quantity demanded because the income effect outweighs the usual substitution effect.

This is an unusual exception to the law of demand rather than evidence against it, and it is not needed to apply the ordinary demand curve analysis used throughout this unit.

Glossary

• Demand — the quantity of a good or service that consumers are willing and able to buy at a given price in a given time period.
• Effective demand — demand backed by both the willingness and the ability of a consumer to pay for a good.
• Law of demand — the principle that, other things being equal, quantity demanded falls as price rises and rises as price falls.
• Demand schedule — a table showing the quantity of a good demanded at a series of different prices.
• Demand curve — a graph showing the quantity of a good demanded at each possible price, usually sloping downward from left to right.
• Quantity demanded — the exact amount of a good bought at one particular price, shown as a single point on the demand curve.
• Extension of demand — a rise in quantity demanded caused by a fall in the price of the good itself, shown as a movement along the demand curve.
• Contraction of demand — a fall in quantity demanded caused by a rise in the price of the good itself, shown as a movement along the demand curve.
• Individual demand — the demand for a good from one particular consumer at each price.
• Market demand — the total demand for a good from all consumers in a market, found by adding individual demands at each price.
• Conditions of demand — the non-price factors, such as income, related prices and tastes, that are held constant when a demand curve is drawn.
• Increase in demand — a rightward shift of the whole demand curve, so that more is demanded at every price.
• Decrease in demand — a leftward shift of the whole demand curve, so that less is demanded at every price.
• Substitute goods — goods that can be used in place of each other, so that demand for one usually moves with the price of the other.
• Complementary goods — goods consumed together, so that demand for one usually moves against the price of the other.
• Normal good — a good for which demand rises as income rises and falls as income falls.
• Inferior good — a good for which demand falls as income rises and rises as income falls.

Common errors and misconceptions

• Misconception: any change in quantity bought is called a "change in demand". Correct: a change caused only by the good's own price is a movement along the curve (extension or contraction); only a change caused by a condition of demand is a true increase or decrease in demand.
• Misconception: "demand" and "quantity demanded" mean the same thing. Correct: demand is the whole relationship between price and quantity, shown by the whole curve; quantity demanded is the specific amount bought at one price, a single point on that curve.
• Misconception: an increase in demand always shifts the curve to the left. Correct: an increase in demand shifts the whole curve to the right, meaning more is demanded at every price; a decrease shifts it to the left.
• Misconception: wanting a good is the same as demanding it. Correct: demand requires both willingness and ability to pay; a wish for a good that a consumer cannot afford is not effective demand.
• Misconception: market demand is the average of individual demands. Correct: market demand is the sum, not the average, of all individual consumers' demand at each price.
• Misconception: a good must always be either normal or inferior. Correct: the same good can be a normal good at low incomes and an inferior good once income rises beyond a certain point.
• Misconception: a rise in the price of a substitute reduces demand for the other good. Correct: a rise in the price of a substitute usually raises demand for the other good, as buyers switch towards it.

Exam-style questions with model answers

Q1. Define 'market demand'. [2 marks]

1. Market demand is the total quantity of a good that all consumers in a market are willing and able to buy at a given price.
2. It is found by adding together the individual demand of every consumer in the market at that price.

Q2. At a price of $6 per unit, Consumer X demands 4 units and Consumer Y demands 12 units, and these are the only two consumers in the market. Calculate the market demand at a price of $6. [2 marks]

1. Market demand = Consumer X's demand + Consumer Y's demand.
2. Market demand = 4 + 12 = 16 units at a price of $6.

Q3. The price of a good falls from $10 to $8 and, with the consumer's income, the prices of other goods and her tastes unchanged, the quantity she demands rises from 30 to 40 units. Explain whether this is a movement along the demand curve or a shift of the demand curve, and name the change. [4 marks]

1. Only the price of the good itself changed; income, other prices and tastes stayed the same.
2. Because the condition of demand did not change, the demand curve itself does not move.
3. The change in quantity is shown as a movement along the existing demand curve, not a shift.
4. Since price fell and quantity demanded rose, from 30 to 40 units, this is an extension of demand.

Q4. Explain two conditions of demand, other than the price of the good itself, that could cause the demand curve for a good to shift to the right. [4 marks]

1. A rise in consumer income can shift the demand curve right for a normal good, because consumers can now afford to buy more of the good at every price.
2. A rise in the price of a substitute good can shift the demand curve right for the good in question, because consumers switch away from the now dearer substitute towards this good.
3. A fall in the price of a complementary good can also shift demand right, because more of the complement is bought, increasing demand for the good that goes with it.
4. A favourable change in tastes towards the good, for example through advertising or fashion, raises the quantity consumers wish to buy at every price.

Q5. Two consumers, A and B, have individual demand schedules for a good: at $2 per unit, A demands 8 units and B demands 20 units; at $4 per unit, A demands 6 units and B demands 16 units. Using this data, explain how the market demand curve for the good is derived, and state the market demand at each of the two prices. [6 marks]

1. Market demand is the total quantity that all consumers in the market are willing and able to buy at each price.
2. It is derived by horizontal summation: the individual demand curves of A and B are added together quantity by quantity at each price.
3. At a price of $2, market demand = A's demand + B's demand = 8 + 20 = 28 units.
4. At a price of $4, market demand = A's demand + B's demand = 6 + 16 = 22 units.
5. The market demand curve therefore lies to the right of either individual consumer's demand curve, because it represents the combined purchases of both buyers.
6. As price rises from $2 to $4, market demand falls from 28 to 22 units, confirming the negative relationship between price and quantity demanded that applies to the whole market, not only to a single consumer.

Q6. Milk is a normal good and margarine is a substitute for butter. Discuss how (i) a rise in consumer income and (ii) a rise in the price of butter would each affect the demand curve for milk and for margarine respectively, including the direction of any shift. [6 marks]

1. Milk is a normal good, so a rise in consumer income raises the quantity of milk demanded at every price.
2. This is shown by a rightward shift of the whole demand curve for milk, since more is now demanded at any given price than before.
3. This is a shift of the curve, not a movement along it, because the price of milk itself has not changed; income, a condition of demand, has changed instead.
4. Margarine is a substitute for butter, so a rise in the price of butter makes butter relatively more expensive compared with margarine.
5. Consumers switch away from the now dearer butter towards margarine, so the quantity of margarine demanded rises at every price.
6. This is shown by a rightward shift of the whole demand curve for margarine, again because the price of margarine itself has not changed; the price of a related good has changed instead.

Key takeaways

• Demand is the quantity of a good consumers are willing and able to buy at a given price in a given time period, not simply a wish for the good.
• The law of demand states that, other things being equal, quantity demanded falls as price rises and rises as price falls.
• A change in the good's own price causes a movement along the demand curve: an extension when price falls, a contraction when price rises.
• Market demand is found by adding the individual demand of every consumer in the market together at each price, known as aggregation.
• Conditions of demand are non-price factors, such as income, related prices and tastes, held constant when a demand curve is drawn.
• A change in a condition of demand shifts the whole demand curve: right for an increase in demand, left for a decrease.
• For a normal good, demand moves with income; for an inferior good, demand moves against income.
• Demand for a good usually moves with the price of its substitutes and against the price of its complements.

Test yourself

What two conditions must be met for a consumer to have "effective demand" for a good?

The consumer must be both willing to buy the good and able to afford it at the given price; a wish for a good without the money to pay for it is not effective demand.

What is the difference between an extension of demand and an increase in demand?

An extension is a rise in quantity demanded caused by a fall in the good's own price, a movement along the curve. An increase is a rise in demand at every price caused by a condition of demand changing, shifting the whole curve right.

How is the market demand curve derived from individual demand curves?

By horizontal summation: the quantity each individual consumer demands at a given price is added together across all consumers, and this is repeated at every price to trace the market demand curve.

If a rise in income causes the demand for a good to fall, what type of good is it?

It is an inferior good, because its demand moves in the opposite direction to the consumer's income.

Give one example each of a pair of substitute goods and a pair of complementary goods.

Tea and coffee are substitute goods, since one can be used in place of the other; tea and sugar are complementary goods, since they are usually consumed together.

Why does a rise in the price of a complementary good usually decrease demand for the other good?

Because the two goods are consumed together, a rise in the price of one makes buying the pair more expensive overall, so consumers buy less of both, reducing demand for the other good at every price.

On a demand diagram, which axis shows price and which shows quantity demanded?

Price is measured on the vertical axis and quantity demanded is measured on the horizontal axis.