DP Economics HL 2.1 Demand

DP Economics HL 2.1 Demand - Full notes

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DP Economics HL | 2.1 Demand

DP ECONOMICS · UNIT 2: MICROECONOMICS

2.1

Demand

Full notes for HL · IB-style

Contents

1	Markets, buyers and the meaning of demand
2	Demand schedules and demand curves
3	The law of demand: why demand curves slope downward
4	Movements along the demand curve and shifts of the curve
5	The non-price determinants of demand
6	Demand in the real world: two case studies
7	Linear demand functions (HL only)
8	Consumer surplus (introduction)
9	Market demand from individual demand
10	Determinants of demand: applied examples
11	Diminishing marginal utility and demand
12	Income and substitution effects
13	Exceptions to the law of demand (extension)
14	Additional exam-style practice
15	Common misconceptions and links
16	Exam-style question with markscheme
17	Check your understanding
18	Summary and topic map

These are full teaching notes. Read each section in order, try the Think about it question before you read on, and do every Quick check before moving to the next section.

Before you start

Rate yourself on each statement now, and again after you've worked through the notes. Shade R (not yet), A (getting there) or G (confident).

I can…	R	A	G
explain what a market is and what economists mean by demand
explain why demand must be both willing and able, and why a time period matters
build a demand schedule and draw a correctly labelled demand curve
derive market demand from individual demand by horizontal summation
state the law of demand and explain it using the income effect, the substitution effect and diminishing marginal utility
distinguish a movement along the demand curve from a shift of the curve, using the correct language
explain each non-price determinant of demand with a diagram and a real example
apply demand analysis to a real market described in a data extract
use a linear demand function Qd = a − bP, plot it, and interpret a and b
calculate the effects of changes in a and b, and derive market demand from individual functions

Section 7 (linear demand functions) is Additional Higher Level content. Every other section is common to SL and HL.

Guiding questions

Why do people buy more of something when its price falls? What can make people want more or less of a good even when its price has not changed? How do the choices of millions of individual consumers add up to the demand in a market?

How this topic is examined

Demand is the first building block of the whole microeconomics unit. On its own it is rarely the subject of a full essay, but it appears inside almost every question you will answer: whenever a market changes, you begin by asking whether demand or supply has moved, and why.

In Paper 1 (extended response) you will often explain a change in a market in part (a), using a demand and supply diagram. In Paper 2 (data response) you meet short definitions (2 marks), diagram questions (4 marks) and analysis of a real market described in a text. In Paper 3 (HL policy paper) you will use linear demand functions to calculate quantities, prices and revenue, and to show how a change in a non-price factor shifts the function.

Command term	What the examiner wants
Define	the precise meaning, ideally in the IB wording, in one or two sentences
Draw / Sketch	a fully labelled diagram: Price on the vertical axis, Quantity on the horizontal, every curve, equilibrium and shift labelled
Explain	a causal chain: what changes, which curve moves and why, what happens at the old price, and the new equilibrium price and quantity
Analyse	break a situation into its parts, e.g. separate the effects of two changes that happen at once
Evaluate / Discuss	weigh up factors, question assumptions such as ceteris paribus, and reach a justified conclusion
Calculate	substitute correctly into the demand function, show each step and give units ($, units per week)

How to use these notes

Each section teaches one part of the syllabus in full. You'll see these boxes throughout; each has one job:

Box	What it's for
Think about it	a question to get you thinking before a section; the answer comes in the section
Key point	the one idea you must not forget
Common mistake	an error examiners see every year, and how to avoid it
In the real world	where the economics shows up outside the classroom
Try this	something quick you can do yourself to test the idea
Worked example	full solutions with IB-style marks (M1 method, A1 answer, R1 reasoning)
Quick check	short questions to test yourself at the end of each section

1 Markets, buyers and the meaning of demand

Demand is not what people want. It is what they are willing and able to buy, at each price, over a period of time.

Think about it

You would love a new sports car, and a dealer is selling one for $90 000. Is your wish part of the demand for sports cars? What would have to be true for it to count?

1.1 What is a market?

A market is any arrangement that brings buyers and sellers together so that they can exchange goods, services or resources. It does not have to be a physical place. A street market, a car showroom, an online store, a stock exchange and a labour market where firms hire workers are all markets. What they have in common is that buyers and sellers interact, and a price emerges from that interaction.

Economists split every market into two sides. The buyers make up the demand side, and the sellers make up the supply side. In this booklet we look only at the demand side: how much buyers want to buy, and what makes that amount change. In 2.2 you will study supply, and in 2.3 you will put the two sides together to see how the market price is set.

Markets can be local (a neighbourhood bakery), national (the market for petrol in India) or global (the market for crude oil or smartphones). The analysis is the same in each case; only the number of buyers and sellers changes.

1.2 The meaning of demand

In everyday language, 'demand' just means wanting something. In economics the word is much more precise. Demand is the quantity of a good or service that consumers are willing and able to purchase at each possible price, during a particular time period, ceteris paribus.

Every part of that definition matters, so take it one piece at a time.

Willing and able. To count as demand, a consumer must want the good and have the money to pay for it at that price. Your wish for a $90 000 sports car is not demand unless you can actually pay $90 000. Economists sometimes call this effective demand to make the point: a want backed by purchasing power. A student who would like a car but has no income adds nothing to the demand for cars. A wealthy person who could afford one but has no interest in it adds nothing either. Only when both conditions are met does a purchase become part of demand.

At each possible price. Demand is not a single number. It is a whole relationship: at $2 a consumer might buy 10 coffees a week, at $3 only 7, at $4 only 5. Demand describes the full set of these price and quantity pairs. The amount bought at one particular price is called the quantity demanded. Keeping these two terms apart is one of the most important habits you can build in this topic.

In a given time period. A quantity only means something if we know the period. '50 litres of milk' could be a huge amount for one day or a tiny amount for one year. Demand is always measured per week, per month or per year.

Ceteris paribus. This Latin phrase means 'all other things being equal'. When we draw a demand curve, we assume that everything that might affect buying decisions stays constant except the good's own price. Incomes, tastes, the prices of other goods and the number of buyers are all held fixed. That assumption is what allows us to isolate the effect of price on quantity. When any of those other factors does change, the whole demand curve moves, which is the subject of Sections 4 and 5.

Term	Meaning
Market	any arrangement where buyers and sellers interact to exchange goods, services or resources
Demand	the quantity of a good consumers are willing and able to buy at each possible price, in a given time period, ceteris paribus
Effective demand	a want backed by the ability to pay
Quantity demanded	the amount demanded at one particular price
Ceteris paribus	all other things being equal: every influence except the good's own price is held constant

Key point

Demand is the whole relationship between price and quantity, the whole curve. Quantity demanded is one point on it. Most mistakes in this topic come from mixing these two up.

Common mistake

Defining demand as 'how much people want a good'. That misses 'able to buy', 'at each price' and 'in a time period', and the definition marks are lost. Learn the full definition word for word.

Quick check

1. Give two examples of markets that are not physical places.

2. Why is a wish for a good not enough to count as demand?

3. What is the difference between demand and quantity demanded?

4. Why must demand be measured over a time period?

Answers: 1. e.g. online shopping, the labour market 2. demand must be backed by ability to pay 3. the whole relationship vs one point 4. a quantity is meaningless without a period

2 Demand schedules and demand curves

A schedule is a table of choices. A curve is the same information as a picture.

Think about it

If you had to predict how many concert tickets you would buy in a year at prices of $20, $40, $60 and $80, could you do it? What would your numbers show?

2.1 The individual demand schedule

The simplest way to show demand is a demand schedule: a table listing the quantity a consumer would buy at each price, in a given period, with everything else held constant. Think about Asha, a student who goes to the cinema. If tickets cost $5 she would go twice a month; at $1 she would go ten times. The schedule records her whole set of choices.

Notice that a schedule describes plans, not actual purchases. Asha only actually pays one price in a given month; the schedule tells us what she would do at every possible price. That is why demand is a set of possibilities, and why economists talk about a consumer being 'willing and able' at each price.

Price of a ticket ($)	Asha's quantity demanded per month	Ben's quantity demanded per month
5	2	2
4	4	5
3	6	8
2	8	11
1	10	14

2.2 From a schedule to a demand curve

A demand curve plots the schedule on a graph. By convention economists always put price on the vertical axis and quantity on the horizontal axis. This may feel odd, because we usually think of price as the cause and quantity as the effect, and in mathematics the cause normally goes on the horizontal axis. The convention comes from the economist Alfred Marshall, and every IB diagram follows it, so you must too.

Each row of the schedule becomes one point on the graph. Joining the points gives the demand curve. For most goods the curve slopes downward from left to right: at high prices little is demanded, at low prices more is demanded. In exams the demand curve is usually drawn as a straight line for simplicity, and labelled D.

Figure 1. Individual demand curves for Asha and Ben, and the market demand curve formed by adding their quantities at each price.

Read the figure one curve at a time. Asha's curve starts at 2 tickets when the price is $5 and reaches 10 tickets when the price falls to $1. Ben is a keener cinema-goer, so at every price below $5 he buys more than Asha, and his curve lies further to the right. The red line is market demand, which we build next.

2.3 Market demand: adding up individual demand

A market contains many consumers, not one. Market demand is the sum of the quantities demanded by all consumers at each price. To find it, take each price in turn and add up what every consumer would buy at that price. On a graph this means adding the individual curves horizontally: at each price you add the distances along the quantity axis.

At $3, Asha buys 6 tickets and Ben buys 8, so market quantity demanded is 14. At $1, they buy 10 and 14, so market quantity demanded is 24. Repeating this at every price gives the market demand schedule below. Real markets have thousands or millions of consumers, but the principle is identical.

Price ($)	Asha	Ben	Market quantity demanded
5	2	2	4
4	4	5	9
3	6	8	14
2	8	11	19
1	10	14	24

Two features of market demand are worth noticing. First, the market curve always lies further from the origin than any individual curve, because more people are buying. Second, it is usually flatter: when the price falls by $1, every consumer responds at the same time, so the total change in quantity is the sum of all their responses.

Market demand also changes when the number of consumers changes. If a third consumer joins the market, there is a new set of quantities to add at every price, and the market curve moves to the right. You will meet this again as a non-price determinant in Section 5.

WORKED EXAMPLE 1 Building market demand

A third consumer, Chen, would buy 1, 2, 3, 4 and 5 tickets at prices of $5, $4, $3, $2 and $1 respectively. (a) Find the market quantity demanded at $3 when Chen joins Asha and Ben. (b) Explain what happens to the market demand curve when Chen joins the market.

Solution

(a) At $3: Asha 6, Ben 8, Chen 3. Add the quantities, not the pricesM1

market quantity demanded = 6 + 8 + 3 = 17 tickets per monthA1

(b) At every price there is now an extra quantity to add (Chen's)R1

so market quantity demanded is higher at every price and the curve shifts to the rightA1

The commonest slip is adding prices ('$3 + $3 + $3 = $9'). Market demand is found by adding quantities at a given price, always.

Common mistake

Putting quantity on the vertical axis because 'quantity depends on price'. Economics reverses the usual maths convention: price goes on the vertical axis. Swap them and every diagram mark in the paper is at risk.

Try this

Write your own demand schedule for coffee (or bubble tea) for one month at prices of $2, $3, $4, $5 and $6. Plot it with price on the vertical axis. Does your curve slope downward? If not, ask yourself why you would buy the same amount at every price.

Quick check

1. What does each row of a demand schedule show?

2. Which variable goes on the vertical axis of a demand diagram?

3. How is market demand derived from individual demand?

4. Why is the market demand curve usually flatter than an individual's?

Answers: 1. the quantity a consumer would buy at one price 2. price 3. add quantities at each price (horizontal summation) 4. every consumer responds to a price change at once

3 The law of demand: why demand curves slope downward

Price down, quantity demanded up. Your job is to explain why.

Think about it

A supermarket cuts the price of strawberries by half. Who buys more, and why? Try to think of at least two different reasons before you read on.

3.1 Stating the law of demand

The law of demand states that, ceteris paribus, there is an inverse (negative) relationship between the price of a good and the quantity demanded. When price rises, quantity demanded falls; when price falls, quantity demanded rises. This is why demand curves slope downward.

It is called a 'law' because the relationship has been observed in an enormous number of markets over a very long time. But stating the law is only worth one mark in an exam. The marks come from explaining it. Economists offer three explanations, and they work together: the income effect, the substitution effect, and diminishing marginal utility.

3.2 The income effect

Suppose you spend $40 a month on bus fares, and the fare falls by a quarter. You can now make the same journeys for $30, leaving $10 that you can spend on anything, including extra bus trips. Your money income hasn't changed, but your real income, meaning what your income can actually buy, has risen.

The income effect is the change in quantity demanded that results from this change in real income (purchasing power) when the price of a good changes. A fall in price raises real income, so consumers can afford to buy more of the good. A rise in price lowers real income, so they buy less.

The income effect is strongest for goods that take a large share of a consumer's budget, such as rent, food in low-income households, or a daily commute. For a good that costs very little, such as salt, a price change barely affects real income, so the income effect is tiny.

3.3 The substitution effect

Most goods have substitutes: other goods that meet the same need. If the price of chicken falls while the price of beef stays the same, chicken has become relatively cheaper. Some consumers who used to buy beef switch to chicken. The substitution effect is the change in quantity demanded that results from a change in the good's price relative to the prices of its substitutes.

The substitution effect always works in the same direction as the law of demand: a lower relative price leads consumers to substitute towards the good, and a higher relative price leads them to substitute away from it. The more close substitutes a good has, the larger the substitution effect. A single brand of cola, with many rival brands, has a large one. Tap water, with no real substitute, has almost none.

Effect	Why quantity demanded rises when price falls	Example
Income effect	real income (purchasing power) rises, so more of the good can be afforded	a 25% cut in bus fares leaves commuters money for extra trips
Substitution effect	the good becomes cheaper relative to its substitutes, so buyers switch to it	cheaper train tickets persuade some drivers to switch to rail

3.4 Diminishing marginal utility

The third explanation comes from the way consumers value goods. Utility is the satisfaction or benefit a consumer gets from consuming a good. Total utility is the overall satisfaction from all the units consumed. Marginal utility is the extra satisfaction from consuming one more unit.

The law of diminishing marginal utility states that as a consumer consumes more units of a good in a given period, the marginal utility of each additional unit falls. The first slice of pizza when you are hungry is wonderful. The second is very good. By the fifth you are full and it adds very little. Total utility still rises with each slice, but by smaller and smaller amounts.

Slice of pizza	Marginal utility (utils)	Total utility (utils)
1	20	20
2	15	35
3	10	45
4	6	51
5	3	54

Figure 2. Marginal utility falls with each extra slice: the law of diminishing marginal utility.

How does this explain the shape of the demand curve? A rational consumer will only pay for an extra unit if the satisfaction it gives is worth the price. Because each extra unit gives less satisfaction than the last, the consumer is willing to pay less for each extra unit. So to persuade consumers to buy more units, the price must fall. Plot the maximum price a consumer would pay for each extra unit and you get a downward-sloping demand curve.

This idea also explains why total spending on a good can stop rising even when people still enjoy it: once marginal utility falls below what the money could buy elsewhere, the consumer stops buying more.

WORKED EXAMPLE 2 Marginal utility and willingness to pay

A student values 1 util at $0.20. The marginal utilities of successive slices of pizza are 20, 15, 10, 6 and 3 utils. (a) Calculate the maximum the student would pay for each slice. (b) How many slices will she buy at a price of $2.00? (c) Explain how this links to the law of demand.

Solution

(a) Multiply each marginal utility by $0.20:

20 × 0.20 = $4.00; 15 × 0.20 = $3.00; 10 × 0.20 = $2.00; 6 × 0.20 = $1.20; 3 × 0.20 = $0.60A1

(b) She buys every slice worth at least the price. Slices 1, 2 and 3 are worth $4.00, $3.00 and $2.00, so she buys 3 slicesA1

(c) To buy a 4th slice the price would have to fall to $1.20 or less: a lower price is needed for a larger quantity, which is the law of demandR1

Total utility (20 + 15 + 10 + 6 + 3 = 54 utils) keeps rising. It is marginal utility that falls, and it is marginal utility that sets willingness to pay.

In the real world

Multi-buy offers such as '3 for the price of 2' are diminishing marginal utility in action. The third item is worth less to you than the first, so the shop lowers its effective price to persuade you to buy it.

3.5 Exceptions to the law of demand

A few situations appear to break the law of demand. You should know them, but treat them as exceptions; in an exam, assume the law holds unless a question tells you otherwise.

Veblen (status) goods. Some luxury goods are bought partly to signal wealth: designer handbags, luxury watches, rare cars. Part of their appeal is the high price itself. If the price fell sharply, some buyers would lose interest because the good no longer signals status, so quantity demanded could fall.

Giffen goods. In very poor households, a staple food such as rice or bread can take most of the budget. If its price rises, the family can no longer afford the more expensive foods it used to buy alongside it, and ends up buying more of the staple to fill the gap. Here the income effect is strong enough to outweigh the substitution effect. True Giffen goods are rare and hard to prove.

Expectations. If a price rise makes people expect further rises, as in housing or share markets, they may buy more now. Strictly this is not an exception at all: the expectation is a non-price factor that shifts demand, which you will meet in Section 5.

Key point

The income effect, the substitution effect and diminishing marginal utility explain the slope of the demand curve. They describe what happens when the good's own price changes, so they are reasons for a movement along the curve, never for a shift.

Common mistake

Writing 'the income effect means that when people's incomes rise they buy more'. That describes an actual change in income, which is a non-price determinant that shifts demand. The income effect is about real income changing because the good's own price changed.

Quick check

1. State the law of demand.

2. Explain the income effect of a fall in the price of rice for a low-income family.

3. Why does the substitution effect make demand for one brand of cola very responsive to its price?

4. Define marginal utility and explain why it falls.

Answers: 1. inverse relationship between price and quantity demanded, ceteris paribus 2. real income rises, more can be afforded 3. many close substitutes to switch to 4. extra satisfaction from one more unit; each extra unit satisfies less as needs are met

4 Movements along the demand curve and shifts of the curve

The good's own price moves you along the curve. Anything else moves the curve itself.

Think about it

Petrol prices rise sharply. What happens to (a) the quantity of petrol demanded and (b) the demand for large cars? Are these the same kind of change?

4.1 Two different kinds of change

A demand curve is drawn holding everything constant except the good's own price. That gives us a clear rule for how to show a change on a diagram.

If the price of the good itself changes, nothing about the relationship between price and quantity has changed; the consumer simply moves to a different point on the same curve. This is a movement along the demand curve. A fall in price causes an extension (an increase in quantity demanded); a rise in price causes a contraction (a decrease in quantity demanded).

If any other factor changes, such as income, tastes or the price of another good, then the consumer would buy a different quantity at every price. The whole relationship has changed, so we must draw a new demand curve. This is a shift of the demand curve. A shift to the right is an increase in demand; a shift to the left is a decrease in demand.

Figure 3. (a) A fall in the good's own price causes a movement along the curve from A to B. (b) A change in a non-price factor shifts the whole curve from D1 to D2.

Look at panel (a). The consumer starts at point A. When the price falls, she moves down the same curve to point B and buys more: an extension of quantity demanded. Now look at panel (b). The price stays at P, but something else has changed, say her income has risen. At the same price she now buys more, and the same is true at every other price, so the whole curve has moved right from D1 to D2.

There is a second way to read a rightward shift that is very useful in exams: for any given quantity, consumers are now willing to pay a higher price. A rightward shift is both 'more demanded at every price' and 'a higher price willingly paid for every quantity'.

	Movement along the curve	Shift of the curve
Caused by	a change in the good's own price	a change in a non-price determinant
Correct language	extension or contraction in quantity demanded	increase or decrease in demand
On the diagram	move from one point to another on the same curve	draw a new curve, D1 to D2
Example	cinema tickets fall from $10 to $8, so more are bought	a hit film raises demand for tickets at every price

4.2 Why the distinction matters

This is not just about vocabulary. If you treat a price change as a shift, your analysis becomes circular: 'the price falls, so demand rises, so the price rises again'. That argument goes nowhere, and examiners see it every year. Keeping movements and shifts apart lets you trace cause and effect correctly: a non-price factor shifts demand, the shift changes the equilibrium price, and the change in price then causes movements along the supply curve (as you will see in 2.3).

WORKED EXAMPLE 3 Movement or shift?

Classify each change in the market for coffee as a movement along or a shift of the demand curve, and give its direction: (a) the price of coffee falls; (b) the price of tea rises; (c) a study links coffee to a longer life; (d) the price of sugar rises sharply.

Solution

(a) coffee's own price changes: movement along the curve, an extension in quantity demandedA1

(b) tea is a substitute and is now dearer: demand for coffee shifts rightA1

(d) sugar is a complement for many coffee drinkers: drinking coffee becomes dearer, so demand for coffee shifts leftA1

The test is always the same: is the change in coffee's own price? If yes, it's a movement. If no, the curve shifts.

Common mistake

Writing 'the price falls, so demand increases'. A fall in a good's own price increases the quantity demanded; demand itself (the curve) is unchanged. Use 'demand' only for shifts.

Try this

Over one week, note three things you bought. For each, write down one non-price factor that would make you buy more of it at the same price, and one that would make you buy less. You have just listed shifts of your own demand curves.

Quick check

1. What causes a movement along a demand curve?

2. What is the correct term for a rise in quantity demanded caused by a price fall?

3. Give two ways to describe a rightward shift of demand.

4. Classify: a fall in the price of games consoles, in the market for video games.

Answers: 1. a change in the good's own price 2. an extension in quantity demanded 3. more demanded at every price; a higher price willingly paid for every quantity 4. complement cheaper, demand for games shifts right

5 The non-price determinants of demand

Six factors shift the demand curve. For each one, know the direction, the reason and a real example.

Think about it

A government gives every family a one-off payment of $500. Which goods would see demand rise? Could demand for any good fall?

The non-price determinants of demand are the factors, other than the good's own price, that influence how much consumers are willing and able to buy. A change in any of them shifts the demand curve. The IB syllabus lists income, the prices of related goods (substitutes and complements), tastes and preferences, and the number of consumers; expectations are also widely used. Each is explained in full below.

Determinant	Demand increases (shifts right) when...	Example
Income: normal goods	income rises	foreign holidays, restaurant meals, new cars
Income: inferior goods	income falls	bus travel, instant noodles, second-hand clothes
Price of a substitute	the substitute's price rises	tea becomes dearer, demand for coffee rises
Price of a complement	the complement's price falls	printers become cheaper, demand for ink rises
Tastes and preferences	the good becomes more fashionable or seems healthier	plant-based milk
Number of consumers	more buyers enter the market	a growing, ageing population raises demand for health care
Expectations	consumers expect prices or their incomes to rise	buying before a tax rise

5.1 Income: normal goods and inferior goods

For most goods, when consumers' incomes rise they buy more at every price, and when incomes fall they buy less. These are normal goods. Holidays, eating out, clothing and cars are normal goods for most people. A rise in income shifts their demand curve to the right; a fall shifts it to the left.

For some goods the opposite happens. As incomes rise, consumers buy less, because they can now afford better alternatives that they prefer. These are inferior goods. Examples include bus travel (people switch to driving), the cheapest own-brand foods, instant noodles, and second-hand clothing. A rise in income shifts demand for an inferior good to the left.

'Inferior' has nothing to do with quality. It only describes how demand responds to income. Whether a good is normal or inferior also depends on who is buying it and how rich they are: rice can be a normal good for a low-income family in one country and an inferior good for wealthier households elsewhere.

This distinction matters for businesses. During a recession, when incomes fall, demand for inferior goods often rises while demand for luxuries falls sharply. Discount supermarkets and budget airlines tend to do relatively well in downturns, while luxury car makers suffer.

Figure 4. A rise in income shifts demand right for a normal good and left for an inferior good.

In panel (a), with supply unchanged, the rightward shift raises both the equilibrium price and quantity. In panel (b) the leftward shift lowers both. The direction of the shift is decided entirely by whether the good is normal or inferior.

5.2 The prices of related goods: substitutes and complements

Substitutes are goods that can be used in place of each other to satisfy the same want: Coca-Cola and Pepsi, tea and coffee, buses and trains, butter and margarine. If the price of one substitute rises, consumers switch to the other, so demand for the other good increases. If the price of one substitute falls, demand for the other decreases.

Complements are goods that are used together, so buying one usually means buying the other: cars and petrol, printers and ink cartridges, smartphones and apps, tennis rackets and tennis balls. If the price of one complement rises, people buy less of it, and therefore need less of the other, so demand for the other good decreases. If the price of a complement falls, demand for the other good increases.

The trick is to follow the price of the other good. A change in the price of tea moves along the demand curve for tea, but it shifts the demand curve for coffee. Students who forget this end up shifting the wrong curve.

Change	Effect on demand for good X	Why
price of substitute Y rises	increase (shift right)	consumers switch from Y to X
price of substitute Y falls	decrease (shift left)	consumers switch from X to Y
price of complement Z rises	decrease (shift left)	using X with Z becomes more expensive
price of complement Z falls	increase (shift right)	using X with Z becomes cheaper

Figure 5. The market for coffee: a dearer substitute increases demand; a dearer complement decreases it.

5.3 Tastes and preferences

Consumers' tastes and preferences change over time, influenced by fashion, advertising, health information, social media, celebrity endorsements and culture. When a good becomes more fashionable or more desirable, demand shifts right; when it falls out of favour, demand shifts left.

Firms spend large amounts on advertising precisely to shift demand for their products to the right, and to make it less responsive to price. Governments use information campaigns to do the reverse for harmful goods: graphic health warnings on cigarette packs are designed to shift the demand curve for cigarettes to the left. Recent examples of changing tastes include the rapid growth in demand for plant-based foods and oat milk, and the fall in demand for sugary soft drinks as consumers became more health-conscious.

5.4 The number of consumers

Market demand is the sum of individual demand, so if the number of consumers rises, market demand increases at every price. Population growth, migration and the opening of new markets all add consumers. When a country joins a trade bloc, foreign buyers can enter, increasing demand for its exports.

The structure of the population matters as well as its size. An ageing population increases demand for health care, retirement housing and pensions advice, but reduces demand for school places and baby products. A rising number of young adults increases demand for rented flats and entertainment.

5.5 Expectations

What consumers expect about the future affects what they buy today. If they expect the price of a good to rise, perhaps because a tax increase has been announced, they buy more now, before the rise, and demand shifts right. If they expect prices to fall, as often happens just before a new smartphone model is launched, they delay purchases, and demand for the current model shifts left.

Expectations about income matter too. If workers fear job losses in a recession, they cut back on spending on big-ticket items such as cars and holidays even before their incomes actually fall. This makes demand fall faster than incomes in a downturn.

In the real world

During the 2020 lockdowns, demand shifted dramatically in many markets at once. Demand for flour, home exercise equipment, laptops and webcams shifted sharply right, while demand for air travel, hotel rooms and restaurant meals collapsed. None of these changes was caused by the goods' own prices: they were caused by changes in tastes, expectations and the ability to consume.

WORKED EXAMPLE 4 Explaining a shift with a diagram

Using a diagram, explain the effect of a rise in average incomes on the market for restaurant meals, which are a normal good. [4]

Solution

Diagram: demand shifts right from D1 to D2; price rises from P1 to P2; quantity rises from Q1 to Q2; axes labelled Price and QuantityA1

Restaurant meals are a normal good, so a rise in income increases demand at every priceR1

At the original price P1 there is now excess demand, because quantity demanded exceeds quantity suppliedR1

Price is bid up until a new equilibrium is reached at a higher price P2 and higher quantity Q2R1

Many answers stop at 'demand increases'. The last two marks come from explaining how the market moves from the old equilibrium to the new one.

Key point

A full shift explanation always has three parts: the determinant that changed, the direction of the shift with the reason, and the effect on equilibrium price and quantity.

Common mistake

Saying a fall in the price of a complement 'shifts the complement's demand curve'. The complement's own price change moves along its own curve; what it shifts is the demand curve of the other good.

Quick check

1. Give an example of an inferior good and explain why demand for it falls as income rises.

2. The price of petrol rises. What happens to the demand for electric cars, and why?

3. How would an ageing population affect demand for school places?

4. Why might demand for houses increase if people expect house prices to rise?

Answers: 1. e.g. bus travel: richer people switch to cars 2. petrol cars dearer to run, so demand for electric cars shifts right 3. decrease, shift left 4. buy now before prices rise: demand shifts right

6 Demand in the real world: two case studies

Real markets change for several reasons at once. Your job is to separate them.

6.1 Case study: the rise of e-bikes in Europe

Between 2019 and 2023, sales of electric bicycles in many European countries roughly tripled. This was not because e-bikes became much cheaper; in fact their prices rose slightly over the period. The increase came from several non-price determinants shifting demand to the right at the same time.

First, the price of a substitute rose: petrol prices increased sharply in 2022, making car journeys more expensive and e-bikes relatively more attractive. Second, tastes and preferences changed as cycling became associated with health, the environment and city living. Third, many governments offered grants that reduced what households actually paid, and many cities built new cycle lanes, which made e-bikes more useful. Each of these shifted demand to the right.

Notice how to write this in an exam: name each determinant, say which way it shifts the curve and why, and then explain the combined effect on equilibrium price and quantity.

6.2 Case study: instant noodles in a recession

When incomes fall in a recession, demand for many normal goods falls. But demand for some goods rises. In several Asian economies, sales of instant noodles have historically increased during economic downturns, while restaurant spending fell. Instant noodles behave as an inferior good for many households: when incomes fall, consumers switch towards them from more expensive meals.

The same logic applies in many markets. Discount retailers, second-hand clothing platforms and public transport often see demand hold up or rise in recessions. Understanding whether a good is normal or inferior helps firms plan for the business cycle.

In the real world

Firms track demand data closely. Supermarkets use loyalty-card data to see how buying patterns change when incomes fall, and they adjust their product ranges, promoting cheaper own-brand lines in a downturn.

Quick check

1. Identify three non-price determinants that increased demand for e-bikes.

2. Why can demand for a good rise in a recession?

3. What evidence would show that a good is inferior?

Answers: 1. price of a substitute (petrol), tastes, grants or infrastructure 2. it is an inferior good for many buyers 3. demand falls when incomes rise (and rises when incomes fall)

7 Linear demand functions (HL only)

One equation, two numbers. Understand what a and b do, and every calculation follows.

HL only

This section is Additional Higher Level content. SL students do not need it.

Think about it

A café sells 100 sandwiches a week when they are free, and 8 fewer for every $1 rise in price. Can you predict its sales at any price? Can you write that rule as an equation?

7.1 What a demand function is

At HL, a straight-line demand curve can be written as an equation called a linear demand function: Qd = a − bP. Here Qd is the quantity demanded in a given period, P is the price, and a and b are constants that describe this particular market.

The constant a is the quantity demanded when the price is zero. On a diagram it is where the curve meets the quantity axis. It captures everything except price that influences demand: income, tastes, related goods' prices, the number of consumers and expectations. So a change in any non-price determinant changes a, and shifts the curve. A rise in a shifts the curve to the right; a fall shifts it to the left.

The constant b shows how much quantity demanded changes for each $1 change in price. It is always positive here, and the minus sign in front of it gives the law of demand. A larger b means quantity demanded is more responsive to price. A change in b changes the steepness of the curve, not its position on the quantity axis.

The price P is the variable. A change in P is simply a movement along the curve, exactly as in Section 4.

Symbol	Meaning	What a change does
Qd	quantity demanded per period	the result of the equation
a	quantity demanded when P = 0 (the quantity-axis intercept)	a rise shifts the curve right; a fall shifts it left
b	change in Qd for each $1 change in price	a rise makes the curve flatter (more responsive); a fall makes it steeper
P	price ($)	a movement along the curve

7.2 Plotting a demand function

Because price goes on the vertical axis but the function gives Q in terms of P, the easiest method is to find the two intercepts. Set P = 0 to get the quantity intercept: Q = a. Set Q = 0 to get the price intercept, called the choke price: 0 = a − bP, so P = a/b. Join the two points with a straight line.

For Qd = 100 − 8P, the quantity intercept is 100 and the choke price is 100 ÷ 8 = $12.50. At any price above $12.50, nobody buys.

You can also rearrange the function to give price in terms of quantity. This is the inverse demand function: P = a/b − Q/b. For Qd = 100 − 8P it is P = 12.5 − 0.125Q. Because price is on the vertical axis, the gradient of the drawn line is −1/b, not −b.

Figure 6. Qd = 100 − 8P, with the effect of a rise in a (parallel shift right) and a rise in b (flatter curve, same quantity intercept).

Read the figure carefully. The navy line is the original function. When a rises from 100 to 140, every point moves 40 units to the right: a parallel shift, because b is unchanged. When b rises from 8 to 10, the curve still meets the quantity axis at 100, but now reaches zero quantity at a lower price ($10 instead of $12.50): it pivots and becomes flatter, because quantity responds more strongly to each $1 of price.

WORKED EXAMPLE 5 Using a demand function

A café's weekly demand for sandwiches is Qd = 100 − 8P. (a) Calculate quantity demanded at $6. (b) Find the choke price. (c) An office block opens nearby and demand becomes Qd = 140 − 8P. Calculate the change in quantity demanded at $6 and the café's revenue at that price.

Solution

(a) Qd = 100 − 8(6) = 100 − 48 = 52 sandwiches per weekA1

(b) 0 = 100 − 8P, so 8P = 100 and P = $12.50M1 A1

This equals the change in a: the curve has shifted right by 40 at every priceR1

revenue = price × quantity = $6 × 92 = $552A1

WORKED EXAMPLE 6 Market demand from individual functions

Two consumers have demand functions QA = 20 − 2P and QB = 30 − 3P. (a) Derive the market demand function. (b) Calculate market quantity demanded at P = $4 and check your answer.

Solution

(a) Market demand adds quantities: Q = (20 + 30) − (2 + 3)P = 50 − 5PM1 A1

(b) Q = 50 − 5(4) = 30A1

Check: QA = 20 − 8 = 12 and QB = 30 − 12 = 18; 12 + 18 = 30

This works only over the range of prices at which both consumers buy. Here both choke prices are $10, so the function is valid for all prices up to $10.

WORKED EXAMPLE 7 Interpreting b

Compare Q1 = 60 − 4P and Q2 = 60 − 6P. (a) Which shows quantity more responsive to price? (b) How do the two curves differ on a diagram?

Solution

(a) For each $1 rise in price, Q1 falls by 4 units and Q2 by 6 units, so Q2 is more responsive to priceR1

(b) Both meet the quantity axis at 60. Q1's choke price is 60 ÷ 4 = $15; Q2's is 60 ÷ 6 = $10A1

So Q2 is the flatter curve on a price–quantity diagramA1

WORKED EXAMPLE 8 A change in a non-price determinant

Demand for umbrellas in a town is Qd = 400 − 20P. A forecast of a rainy month raises quantity demanded by 120 at every price. (a) Write the new demand function. (b) Calculate quantity demanded at $8 before and after.

Solution

(a) a rises by 120: Qd = 520 − 20PA1

(b) before: 400 − 160 = 240; after: 520 − 160 = 360A1 A1

Common mistake

Reading b as the gradient of the drawn curve. Because price is on the vertical axis, the gradient is −1/b. A larger b gives a flatter curve, not a steeper one.

Key point

A change in a shifts the demand curve (parallel). A change in b changes its steepness, pivoting about the quantity intercept. A change in P is only a movement along the curve.

Quick check

1. What does a represent in Qd = a − bP?

2. Qd = 80 − 5P. Find Qd at P = $10.

3. Find the choke price for Qd = 80 − 5P.

4. What happens to the curve if a falls from 80 to 60?

Answers: 1. quantity demanded when the price is zero 2. 30 3. $16 4. it shifts left by 20 at every price

8 Consumer surplus (introduction)

Paying less than you would.

Consumer surplus is the difference between the maximum price consumers are willing to pay (shown by the demand curve) and the price they actually pay. On a diagram it is the area below the demand curve and above the price, up to the quantity bought.

WORKED EXAMPLE 9 Calculation (standard)

Demand: Qd = 120 − 4P. At P = $10, Qd = 80. Calculate consumer surplus.

Solution

Maximum price (Qd = 0) = $30M1

½ × 80 × (30 − 10) = $800A1

Quick check

1. What happens to consumer surplus when price falls?

2. Calculate consumer surplus at P = $15 for the same demand function.

Answers: 1. it increases 2. Qd = 60: ½ × 60 × 15 = $450

9 Market demand from individual demand

Horizontal summation.

Market demand is the horizontal sum of individual demands: at each price, add the quantities each consumer demands.

Price / $	Ana	Ben	Chen	Market
2	8	6	10	24
4	6	4	7	17
6	4	2	4	10
8	2	0	1	3

WORKED EXAMPLE 10 Summation (basic)

Find market demand at $4.

Solution

6 + 4 + 7M1

= 17 unitsA1

10 Determinants of demand: applied examples

Shifts in real markets.

Event	Market	Effect on demand
rise in incomes	restaurant meals (normal good)	increase
rise in incomes	bus travel (inferior good)	decrease
rise in price of coffee	tea (substitute)	increase
rise in price of printers	ink cartridges (complement)	decrease
health campaign	sugary drinks	decrease
expected price rise	housing	increase now

WORKED EXAMPLE 11 Complements (exam level)

Explain the effect of a rise in the price of electric cars on the market for home charging units.

Solution

Fewer electric cars boughtR1

Demand for chargers (complement) decreases: leftward shiftR1

11 Diminishing marginal utility and demand

Why demand slopes down.

As consumption of a good increases, the extra satisfaction (marginal utility) from each extra unit falls. Consumers will pay less for additional units, so quantity demanded rises only as price falls, giving a downward-sloping demand curve.

WORKED EXAMPLE 12 MU (standard)

Explain how diminishing marginal utility leads to a downward-sloping demand curve.

Solution

Each additional unit gives less satisfactionR1

Consumers willing to buy more only at lower pricesR1

12 Income and substitution effects

Two reasons for the law of demand.

When price falls, consumers' real income rises (income effect), so they can afford more; the good is also relatively cheaper than substitutes (substitution effect). Both increase quantity demanded for normal goods.

Quick check

1. Explain the substitution effect of a fall in the price of chicken.

Answers: 1. chicken becomes cheaper relative to beef, so consumers switch to chicken

13 Exceptions to the law of demand (extension)

Veblen and Giffen goods.

Veblen goods (luxury watches, designer bags) may see higher demand at higher prices because of status. Giffen goods are rare staple inferior goods where a price rise reduces real income so much that people buy more of the staple. These are exceptions, not common cases.

Quick check

1. Why might demand for a luxury handbag rise when its price rises?

Answers: 1. higher price signals exclusivity and status (Veblen effect)

14 Additional exam-style practice

Paper 1 and Paper 3 style.

WORKED EXAMPLE 13 Paper 3 style calculation (exam level)

Qd = 500 − 25P. (a) Calculate Qd at P = $8. (b) Calculate the change in Qd when P rises from $8 to $10. (c) A fall in the price of a substitute changes the intercept to 450. Calculate Qd at $8.

Solution

(a) 500 − 200 = 300A1

(b) 250 − 300 = −50 unitsA1

Quick check

1. Explain why the demand curve for a normal good shifts right when income rises.

Answers: 1. consumers can afford more at every price

15 Common misconceptions and links

Students often think…	Actually…
a fall in price increases demand	it increases quantity demanded (a movement along); demand itself, the curve, is unchanged
the income effect is about a pay rise	it is about real income changing because the good's own price changed
all goods are normal goods	inferior goods exist: their demand falls as income rises
'inferior' means low quality	it only describes how demand responds to income
a complement's price change shifts its own demand curve	it moves along its own curve and shifts the other good's demand curve
market demand is found by adding prices	add quantities at each price (horizontal summation)
an increase in demand is a movement up the curve	an increase in demand is a rightward shift of the whole curve
Veblen and Giffen goods disprove the law of demand	they are rare exceptions; the law describes the vast majority of markets
the gradient of the drawn curve equals b	the gradient is −1/b, because price is on the vertical axis

How 2.1 connects to the rest of the course

Topic	Connection
2.2 Supply	supply is the other half of every market model
2.3 Competitive market equilibrium	demand shifts change equilibrium price and quantity; consumer surplus comes from the demand curve
2.4 Critique of maximizing behaviour	behavioural economics questions the rational consumer behind the demand curve
2.5 Elasticity of demand	measures how strongly quantity demanded responds to price and income
2.7 Role of government	taxes, subsidies and price controls all act through demand and supply
3.2 Aggregate demand	AD is the macroeconomic version: total demand across the economy
4.5 Exchange rates	the demand for a currency follows the same logic

16 Exam-style question with markscheme

Try this under exam conditions (about 15 minutes) before reading the markscheme.

Figure 7. E-bike sales in a European country.

Text A. E-bike sales have almost tripled since 2019. Fuel prices rose sharply in 2022, many city councils built new cycle lanes, and a government grant now pays 20% of the price of a new e-bike for low-income households. E-bikes have also become fashionable among young professionals.

(a) Define the term demand. [2]

(b) Calculate the percentage increase in e-bike sales between 2019 and 2023. [2]

(d) Using a demand and supply diagram, explain the effect of the rise in fuel prices on the market for e-bikes. [4]

(e) Weekly demand for e-bikes at one shop is Qd = 60 − 0.02P, where P is the price in $. Calculate quantity demanded at a price of $2000, and the new quantity if a marketing campaign changes the function to Qd = 75 − 0.02P. [3]

Markscheme

Part	Answer	Marks
(a)	the quantity of a good consumers are willing and able to buy	A1
	at each price in a given time period, ceteris paribus	A1
(b)	(5.6 − 1.8) ÷ 1.8 × 100	M1
	= 211% (accept 211.1%)	A1
(c)	any two: price of a substitute (fuel for cars), tastes (fashionable), grants, cycle lanes	A1 A1
(d)	correct diagram: demand shifts right, higher price and quantity, axes labelled	A1
	cars are a substitute for e-bikes and fuel is a complement to cars	R1
	driving becomes dearer, so demand for e-bikes increases at every price	R1
	excess demand at the old price raises equilibrium price and quantity	R1
(e)	Qd = 60 − 0.02(2000) = 20 e-bikes	A1
	new Qd = 75 − 40 = 35 e-bikes	M1 A1

Examiner's comments. In (d), many answers said that fuel prices are 'a determinant of demand' without linking them to e-bikes. The chain must be explicit: fuel is a complement to cars, cars are a substitute for e-bikes, so dearer fuel shifts e-bike demand right. In (b), using 5.6 as the denominator (giving 68%) was the most common error. In (e), a few candidates changed b instead of a, which pivots the curve instead of shifting it.

17 Check your understanding

Section A: multiple choice

1. Which causes a movement along the demand curve for beef?

A. a fall in the price of beef B. a rise in incomes C. a rise in the price of chicken D. a health scare about beef

2. A rise in income leads to a fall in demand for a good. The good is

A. a normal good B. a luxury C. an inferior good D. a complement

3. The price of tennis rackets rises. The demand for tennis balls will

A. shift right B. shift left C. not change D. extend along the curve

4. Market demand is found by

A. adding prices at each quantity B. averaging individual demand C. multiplying price by quantity D. adding quantities at each price

5. The substitution effect of a price fall occurs because

A. real income rises B. the good becomes relatively cheaper C. tastes change D. supply increases

6. Which would shift the demand for umbrellas to the right?

A. a forecast of heavy rain B. a fall in umbrella prices C. a rise in the cost of fabric D. a tax on umbrella producers

7. Diminishing marginal utility means that

A. total utility falls B. prices fall C. income falls D. each extra unit gives less extra satisfaction

8. Expectations of a future price rise for houses will

A. shift demand left now B. cause a movement along demand C. shift demand right now D. have no effect

9. Which pair are complements?

A. tea and coffee B. buses and trains C. butter and margarine D. cars and petrol

10. An ageing population is most likely to increase demand for

A. school places B. health care C. baby products D. student housing

11. For Qd = 90 − 6P, quantity demanded at P = $5 is

A. 30 B. 84 C. 60 D. 96

12. In Qd = a − bP, a rise in a causes

A. a rightward shift B. a movement along C. a leftward shift D. a flatter curve only

Section B: structured

13. Explain the difference between a change in demand and a change in quantity demanded. [4]

14. Using a diagram, explain the effect of a fall in the price of printers on the market for ink cartridges. [4]

15. Explain why the demand curve slopes downward, using the income and substitution effects. [4]

16. Distinguish between normal and inferior goods, giving an example of each. [4]

17. Explain two reasons why demand for health care may increase over the next 20 years. [4]

18. Explain how diminishing marginal utility helps to explain the law of demand. [4]

19. QA = 40 − 4P and QB = 25 − 2.5P. Derive the market demand function and find market quantity at P = $6. [3]

20. Qd = 200 − 10P. Find the choke price and sketch the curve, labelling both intercepts. [3]

Answers

1. A 2. C 3. B 4. D 5. B 6. A 7. D 8. C 9. D 10. B 11. C 12. A

13. A change in demand is a shift of the whole curve caused by a non-price factor (e.g. income); a change in quantity demanded is a movement along the curve caused by the good's own price. Diagrams of each.

14. Printers and ink are complements; cheaper printers raise printer sales, so demand for ink shifts right; excess demand at the old price; higher price and quantity of ink.

15. Income effect: a lower price raises real income, so more can be bought. Substitution effect: the good is cheaper relative to substitutes, so buyers switch to it. Both raise quantity demanded.

16. Normal: demand rises with income (holidays). Inferior: demand falls as income rises (bus travel, cheapest own-brand food).

17. An ageing population (older people use more health care); rising incomes (health care is a normal good); also changing tastes or better information.

18. Each extra unit gives less extra satisfaction, so consumers will pay less for each extra unit; a lower price is needed to sell a larger quantity.

19. Q = 65 − 6.5P; at P = 6: Q = 65 − 39 = 26 (check 16 + 10 = 26).

20. Choke price: 0 = 200 − 10P, P = $20; intercepts (0, $20) and (200, $0), price on the vertical axis.

18 Summary and topic map

Idea	Remember
Market	buyers and sellers interacting; not necessarily a place
Demand	willing and able to buy, at each price, in a time period, ceteris paribus
Law of demand	inverse relationship between price and quantity demanded
Why it slopes down	income effect, substitution effect, diminishing marginal utility
Movement along	own price changes: extension or contraction in quantity demanded
Shift	non-price determinants: income, related goods, tastes, number of consumers, expectations
Normal / inferior	demand rises / falls with income
Substitutes / complements	dearer substitute raises demand; dearer complement lowers it
Market demand	add quantities at each price
Qd = a − bP (HL)	a shifts the curve; b sets responsiveness; gradient −1/b

Before the exam, make sure you…

•can write the full definition of demand, including 'willing and able', 'at each price' and 'time period'
•put price on the vertical axis and quantity on the horizontal, and label every curve
•never say 'demand rises' when the good's own price falls
•explain the law of demand with the income effect, the substitution effect and diminishing marginal utility
•name the determinant behind every shift and give a real example
•track related goods through the other good's price
•finish every shift explanation at the new equilibrium price and quantity
•substitute into Qd = a − bP carefully, changing a for shifts and b for responsiveness

Demand on one page

Cover this page with a sheet of paper and try to rebuild it from memory. Whatever you can't recall is what to revise next.

Figure 8. Topic map for 2.1 Demand.

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