Demand
Demand
Is the number of units of a product which consumers are willing to buy at any given market price
at any given time.
A demand schedule
Is a table showing the number of units of a good that is demanded by a consumer at different
prices.
Price
30c
20c
10c
Ann’s
demand
100
200
300
Demand curve
Is a graph showing the number of units of a good that is demanded at any given market price.
The demand curve for a normal good slopes downward because;
As the price of a good falls the consumer buys more of this cheaper good, because
the marginal utility per cent spent on this good increases and the consumer aims to
maximise their total utility.
Individual Demand
Is the quantity of a good an individual is willing to buy at different prices.
Market (aggregate) demand
Is the total quantity of a good that all consumers are willing to buy at different prices.
Example of a supply schedule (table) Source of information HL 2007 Q 1 (a) (iii)
Price
Ann’s demand
John’s demand
Market
demand schedule
€1
€2
€3
 To derive the market demand, add the quantity demanded by each individual
consumer at each price to calculate the overall quantity demanded by the market at each
price.
 To derive the three demand curves (graphs) plot the three sets of points from the demand
schedules (tables).
 Note the demand curves (graphs) are downward sloping, which means that as price
increases so quantity demanded decreases.
Factors that influence demand
The factors, which influence a consumer's demand schedule are summarized as:
P, Pog, Y, T, U, E, G
1. The price of other goods (Pog)
 If the price petrol increases then the price of its complementary good (a good
that is purchased with another good in order to satisfy a need or want. The purchase of
two complementary goods is usually regarded as one transaction.)– a large car – will
decrease.
 If the price butter increases then the demand for its substitute (a good that can be
used instead of another good to satisfy a need or want.) – margarine – will increase.
2. The income of the consumer (Y)
 For most goods as income rises the demand rises as consumers can afford
more, and when income falls demand falls as consumers cannot afford to buy
as much.
 Eg. when incomes rise there will be more demand for mobile phones, houses,
cars.
 Eg. when income falls there will be less demand for mobile phones,houses and
cars.
3. The consumers' tastes or preference for a commodity (good)
 When a commodity comes into fashion or into season there is an increase in the
quantity demanded at each price.
Eg. The demand for postal services fell when people began using texting and e-mails.
 Advertising attempts to influence taste in favour of the good in order to
increase demand.
4. Unplanned factors
 If there was a sudden heatwave this may result in an increase in the demand for
suncream / ice cream etc.
5. The expectations concerning future prices, availability of income (T)
 If a consumer expects that future prices are likely to be greater than they are at
present, then there will be an increase in the demand for the good at each price.
 Eg. The demand for houses rose during the “property bubble” of the
“naughties”as investors thought that prices would continue to rise.
 However if consumers expects that future prices are likely to be less than they
are at present (deflation), then demand will fall as they will wait to buy the
good at a cheaper price sometime in the future.
 Eg. After the “bubble burst” in 2008 the demand for houses fell as investors
waited to buy them at a cheaper price.
6. Government regulations
If the government starts a programme to curtail (limit) consumption of a particular
product then it may affect the demand for a good.
Eg. a health education campaign to curtail cigarette consumption.
Movement along the demand curve
•
•
•
A price change will cause a movement along the demand curve.
A price increase from P 1 to P 2 will cause demand to fall to Q2.
A price reduction from P 1 to P 3 will cause demand to increase to Q3.
Shifts in the demand curve



All factors other than a change in the price of the good itself will cause a shift in the
demand curve.
Factors that increase demand will cause a shift to the right.
Factors that decrease demand will cause a shift to the left.

In both cases, quantity supplied will change, but price will remain unchanged.
Causes of shifts to the right
Price remains the same but demand increases
Causes of shifts to the left
Price remains the same but demand decreases
1. Consumers’ incomes increase.
With higher incomes people can now
afford to buy more of this good.
2. Change in Consumer Taste
As a good becomes more fashionable more
will be bought.
Advertising also influences consumer
taste.
3. Unplanned events
Good weather will increase the demand for
sun cream.
4. The price of an alternative
good/service goes up
The demand for this god will increase.
5. The prices of Complimentary goods
decrease.
Then the demand for this good will
increase.
6. Technological advances.
With improvements in technology,
manufacturers are now offering newer
models with advanced features, thereby
attracting new consumers and existing
customers to upgrade.
Eg. mobile phones. I-pods etc.
1. Consumers’ income decrease.
With lower incomes people can now less so
demand goes down.
2. Change in Consumer Taste
As a good goes out of fashion less will be
bought.
Bad publicity also influences consumer
taste.
3. Unplanned events
Bad weather will decrease the demand for
sun cream.
4. The price of an alternative
good/service goes down
The demand for this god will decrease.
5. The prices of Complimentary goods
increase.
Then the demand for this good will
decrease.
.
Sample Question OL2008 Q 2
The ‘Law of Demand’?
States that an increase in price leads to a decrease in quantity demanded, or a decrease in price
leads to an increase in quantity demanded.
Example: If price of a bar chocolate increased by 5c per bar then quantity demanded or
purchased would fall. This is why normal goods face a downward facing demand curve.
Exceptions to the ‘Law of Demand’?
1. Giffen Goods
For certain necessities a rise in price causes an increase in quantity demanded while a fall in
price causes a fall in quantity demanded. Goods of lower quality make up a large part of the
spending of low income families. As the price falls, real incomes increase and families buy less
of these goods and purchase more of better quality goods. As the price rises they have less
income to spend on other types of goods so they tend to increase their demand for these goods.
E.g. bread/rice.
2. Status Symbols / Snob items / Ostentatious Goods / Goods of Conspicuous Consumption
Some commodities by their exclusiveness or expensiveness are attractive to some buyers. A rise
in price makes them more exclusive, and therefore, more attractive to those with the incomes to
purchase them. A fall in price may lead to a fall in quantity demanded as they may no longer
appear as exclusive to the rich and are still outside the price range of the poor.
3. Goods the purchase of which is influenced by expectations as to future prices
/ Speculative goods
If prospective buyers think that prices are likely to be even higher in the future, the current level
of demand may not fall even if prices increase e.g. if a person is considering buying a house the
possibility that prices are likely to be even higher in the future will probably stimulate demand at
current prices.
4. Goods of Addiction
In the case of those goods to which a person becomes addicted e.g. drugs, they no longer act
rationally. They become so addicted to the drug that in order to get the same 'buzz' from
consumption of the drug, demand for the commodity may increase, even when the price of the
commodity increases.
Types of goods
Normal good
 Is a good that obeys the law of demand.
 If price increases then the quantity demanded decreases, and if price decreases then
quantity demanded increases (opposite direction).
 If income increases then the quantity demanded increases and if income decreases then
quantity demanded decreases (same direction).
 Eg. A foreign holiday.
Inferior good
 Is also a normal good as it obeys the law of demand.
 If price increases then the quantity demanded decreases, and if price decreases then
quantity demanded increases (opposite direction).
 However it is a good that you buy because you cannot afford a better alternative.
 If income increases then the quantity demanded decreases, and if income decreases then
quantity demanded increases (opposite direction).
 Eg. Cheap cuts of meat eg. Mince.
Giffen good
 Is an inferior good that is consumed by people on very low incomes and a large part of
that income is spent on the good. Eg. A low income family may consume pasta 6 days a
week (as it is a very cheap and filling food) and may have meat once a week. If the price
of pasta increases then they will not be able to afford the meat and will have to consume
pasta on the 7th day as well.
 Therefore it does not obey the law of demand.
 If price increases then the quantity demanded increases, and if price decreases then
quantity demanded decreases (same direction).
 If income increases then the quantity demanded decreases, and if income decreases then
quantity demanded increases.
 Eg. Pasta, rice, bread (opposite direction).
 Note: after the financial crisis of 2008 when incomes in many households dropped the
consumption of bread increased. Many people who previously dined out for lunch
started to bring a packed lunch to work instead.
Substitution Effects & Income Effects
If the price of a good falls, two things happen:
1. Substitution Effect
 The good becomes cheaper relative to other goods.
 The substitution effect will always result in more of a relatively cheaper product being
demanded whether it is a normal, inferior or giffen good.
2. Income Effect
 The real income of the consumer is increased.
 Therefore the consumer has more spending power and can get more for the same money.
 However the income effect can work in two ways.
 If the good is normal then the consumer will buy more due to increased spending power.
 If the good is inferior or giffen then the increase in spending power will cause the
consumer to buy a more superior product and less of the inferior product.
 The income effect for a giffen good is much stronger than for an inferior good due to the
large portion of income that is spent on the giffen good.
The overall effect of a price reduction is summarized below.
Substitution Effect + Income Effect = Price Effect
Substitution Effect
Income Effect
Price Effect
Quantity demanded
Normal Good *Positive
*Positive
Demand increases as the Demand increases as
increases
good is relatively
real income rises.
Because both effects are
cheaper.
positive
Quantity demanded
Inferior Good *Positive
*Negative
Demand increases as the Demand declines as
increases
good is relatively
real income rises.
Because the positive
cheaper.
substitution effect is
stronger than the
negative income effect.
Quantity demanded
Giffen Good *Positive
*Negative
Demand increases as the Demand declines as
decreases
good is relatively
real income rises.
Because the negative
cheaper.
income effect is stronger
than the positive
substitution effect
because a large
proportion of income is
spent on giffen goods. .
*Positive meaning that more is demanded
*Negative meaning that less is demanded.
Sample Exam question 2003 Q 3 (c)
A consumer spends all income on two goods, Good A and Good B. Both goods
are normal goods but they are not complementary goods. The price of Good A is
reduced and the price of Good B remains unchanged. The consumer continues to
spend all income on the two goods. Distinguish between the substitution effect
and the income effect of the price reduction in Good A.
Exam analysis
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