Cambridge IGCSE0455

Demand

Economics 0455 Chapter Notes

What this chapter covers

Demand - Individual and market demandDemand - Movements along a demand curveDemand - Shifts of a demand curve
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In this chapter

  1. 1What is Demand?
  2. 2The Law of Demand and the Demand Curve
  3. 3Movements Along vs. Shifts in Demand
  4. 4Causes of Shifts in the Demand Curve
  5. 5Demand, Supply, and Market Equilibrium

1. What is Demand?

In economics, demand is more than just wanting something. It is the willingness and, crucially, the ability of consumers to purchase a specific quantity of a good or service at a given price in a particular time period. Without the ability to pay (purchasing power), a want does not translate into demand. This concept is known as 'effective demand'. Producers in a market economy are primarily interested in effective demand, as this represents actual potential sales and revenue.

Key term

Effective Demand: The desire for a good or service that is backed by the ability and willingness to pay for it.

Examiner insight

Examiners reward students who clearly distinguish between a 'want' (a desire) and 'demand' (a desire backed by purchasing power).

Common pitfall

Stating that demand is simply 'wanting something' without mentioning the crucial element of being able to afford it.

Worked example 13 marks

A student really wants to buy a £50,000 sports car but only has £50 in their bank account. A successful business owner also wants to buy the same car and has over £1 million in savings. Explain whose want is considered 'effective demand'.

  1. 1

    Step 1: Define effective demand. Effective demand is the desire for a product combined with the financial ability to purchase it.

  2. 2

    Step 2: Apply the definition to the student. The student has the desire (the want) for the car, but lacks the £50,000 required. Therefore, the student's want is not effective demand.

  3. 3

    Step 3: Apply the definition to the business owner. The business owner has both the desire for the car and the financial resources (£1 million) to easily afford the £50,000 price. Therefore, the business owner's want is considered effective demand.

  4. 4

    Conclusion: Only the business owner demonstrates effective demand because they have both the willingness and the ability to pay.

Recap

  • Demand is the quantity of a good consumers are willing and able to buy at a given price.
  • A simple 'want' without the money to buy the item is not demand in an economic sense.
  • Effective demand is the combination of the desire to buy something and the purchasing power to do so.
  • Producers are motivated by effective demand because it represents real sales opportunities.

Quick check

  1. What is the key difference between a 'want' and 'demand'?1 mark

2. The Law of Demand and the Demand Curve

The law of demand describes the fundamental relationship between the price of a good and how much of it people will buy. It states that, ceteris paribus (meaning 'all other things being equal'), as the price of a product falls, the quantity demanded for it will rise. Conversely, as the price of a product rises, the quantity demanded will fall. This inverse relationship can be shown in a table, called a demand schedule, or as a graph, called a demand curve. The demand curve is always downward sloping from left to right, visually representing the law of demand. We can analyse the demand of a single person (individual demand) or the total demand from all consumers in a market (market demand).

Key term

Law of Demand: Ceteris paribus, as the price of a good falls, the quantity demanded will rise, and as the price rises, the quantity demanded will fall.

Examiner insight

Clearly labelling axes (Price and Quantity) and the demand curve (D) on diagrams is essential for gaining full marks. Marks are often lost for sloppy or incomplete diagrams.

Common pitfall

Mixing up the axes on a demand diagram, most commonly by putting Price on the horizontal axis and Quantity on the vertical axis.

Fun fact

The 'Giffen Good' is a rare theoretical exception to the Law of Demand, where demand increases as price increases. This can happen with staple foods in very poor households, where a price rise forces them to buy more of the staple because they can no longer afford more expensive foods.

Worked example 14 marks

The market demand schedule for orange light bulbs is shown below. Plot the market demand curve and use your graph to estimate the quantity demanded at a price of 35 cents.

Price (cents)Market demand per month
50100,000
40150,000
30200,000
20260,000
10370,000
  1. 1

    Step 1: Draw the axes for the graph. The vertical axis should be labelled 'Price (cents)' and the horizontal axis 'Quantity demanded per month'.

  2. 2

    Step 2: Choose a suitable scale for both axes. For price, you could go from 0 to 60 in steps of 10. For quantity, you could go from 0 to 400,000 in steps of 50,000.

  3. 3

    Step 3: Plot the points from the demand schedule onto the graph. For example, the first point is at a price of 50 and a quantity of 100,000.

  4. 4

    Step 4: Join the plotted points with a smooth line or curve. Label this curve 'D' for Demand.

  5. 5

    Step 5: To find the quantity demanded at 35 cents, locate 35 on the vertical (price) axis. Draw a horizontal line across to meet your demand curve. Then, draw a vertical line down to the horizontal (quantity) axis to read the value. This should be approximately 175,000 light bulbs.

Recap

  • The law of demand states there is an inverse relationship between price and quantity demanded.
  • A demand schedule is a table showing quantity demanded at different prices.
  • A demand curve is a graph showing quantity demanded at different prices.
  • The demand curve slopes downwards from left to right.
  • Always label your axes (Price on vertical, Quantity on horizontal) and the curve itself (D).

Quick check

  1. Why does a standard demand curve slope downwards?2 marks

3. Movements Along vs. Shifts in Demand

It is vital to understand the difference between a 'change in quantity demanded' and a 'change in demand'.

A 'change in quantity demanded' is shown as a MOVEMENT along the existing demand curve. This is caused ONLY by a change in the price of the good itself. A fall in price causes an 'extension' or 'expansion' of demand (a movement down the curve), while a rise in price causes a 'contraction' of demand (a movement up the curve).

A 'change in demand' is shown as a SHIFT of the entire demand curve. This is caused by a change in any non-price factor that affects demand. An 'increase in demand' shifts the curve to the right (more is demanded at every price). A 'decrease in demand' shifts the curve to the left (less is demanded at every price).

Key term

Ceteris Paribus: A Latin phrase meaning 'all other things being equal', used in economics to isolate the effect of one variable on another.

Examiner insight

Students who use the precise terms 'change in quantity demanded' for a movement and 'change in demand' for a shift demonstrate a strong understanding and are more likely to score full marks.

Common pitfall

Describing a price change as causing the demand curve to 'shift'. A change in the good's own price causes a movement ALONG the existing curve.

Worked example 14 marks

The price of a popular video game is reduced from £50 to £40 in a sale. Using a diagram, illustrate and explain the effect on the demand for the game.

  1. 1

    Step 1: Draw a standard demand diagram with Price on the vertical axis and Quantity on the horizontal axis. Draw a downward-sloping demand curve and label it D.

  2. 2

    Step 2: Mark the original price, P1 (£50), on the vertical axis and the corresponding quantity, Q1, on the horizontal axis.

  3. 3

    Step 3: Mark the new, lower price, P2 (£40), on the vertical axis. Show that this corresponds to a new, higher quantity, Q2, on the horizontal axis.

  4. 4

    Step 4: Draw an arrow along the demand curve pointing downwards from the point (Q1, P1) to (Q2, P2).

  5. 5

    Step 5: Explain that this is a 'movement along the demand curve' (specifically, an extension of demand) caused by the change in the game's own price. The quantity demanded has increased from Q1 to Q2. There is no shift in the curve.

Recap

  • A change in the price of the good itself causes a movement along the demand curve.
  • A fall in price causes an extension of demand; a rise in price causes a contraction of demand.
  • A change in any other factor (a non-price determinant) causes a shift of the entire demand curve.
  • An increase in demand is a shift to the right; a decrease in demand is a shift to the left.
  • Use the term 'change in quantity demanded' for a movement and 'change in demand' for a shift.

Quick check

  1. A rise in the price of petrol leads to fewer people buying it. Is this a movement along or a shift in the demand curve for petrol?1 mark

4. Causes of Shifts in the Demand Curve

A shift in the demand curve occurs when a non-price factor changes, making consumers willing to buy more or less of a product at every price. Key factors that shift the demand curve include:

  • Income: For normal goods, as income rises, demand increases (shifts right). For inferior goods (like cheap instant noodles), as income rises, demand decreases (shifts left).
  • Prices of Related Goods:
  • Substitutes: These are 'rival' goods (e.g., Pepsi and Coke). If the price of a substitute rises, demand for the other good increases (shifts right).
  • Complements: These are goods used together (e.g., printers and ink cartridges). If the price of a complement rises, demand for the other good decreases (shifts left).
  • Tastes and Fashion: Trends, advertising, and new information (e.g., health reports) can increase or decrease demand.
  • Population: A growing population or a change in its age structure (e.g., an ageing population) will increase demand for certain goods and services.
  • Advertising: Successful advertising campaigns increase brand loyalty and shift the demand curve to the right.
  • Expectations of future prices: If consumers expect prices to rise in the future, they may buy more now, shifting current demand to the right.

Key term

Substitutes: Goods that can be used in place of each other to satisfy a consumer's want, such as butter and margarine.

Examiner insight

When explaining a shift, examiners look for a three-step process: 1) identify the non-price factor, 2) explain why it affects demand, and 3) state the direction of the curve's shift (right/left).

Common pitfall

Confusing substitute goods with complementary goods. For example, stating that an increase in the price of petrol will increase demand for cars (it will decrease it, as they are complements).

Worked example 14 marks

The price of cinema tickets increases. Explain the likely effect on the demand for streaming service subscriptions like Netflix. Use a diagram to illustrate your answer.

  1. 1

    Step 1: Identify the relationship between the goods. Cinema tickets and streaming subscriptions are substitute goods, as they are alternative ways to watch films.

  2. 2

    Step 2: Explain the effect of the price change. An increase in the price of cinema tickets makes streaming services relatively cheaper and more attractive to consumers.

  3. 3

    Step 3: Determine the direction of the shift. Consumers will switch from cinemas to streaming services, causing the demand for streaming subscriptions to increase at every price.

  4. 4

    Step 4: Draw a demand diagram for streaming services. Show the demand curve shifting to the right, from D1 to D2. Label your axes, curves, and the direction of the shift with an arrow.

Worked example 23 marks

The government launches a major public health campaign highlighting the dangers of sugary drinks. Explain the likely effect on the market demand for these drinks.

  1. 1

    Step 1: Identify the non-price factor. The factor is a change in consumer tastes and preferences, influenced by the health campaign.

  2. 2

    Step 2: Explain the effect on consumer behaviour. The campaign will likely make consumers less willing to buy sugary drinks at any given price due to health concerns.

  3. 3

    Step 3: Determine the direction of the shift. This will cause a decrease in demand for sugary drinks.

  4. 4

    Step 4: Describe the graphical change. The demand curve for sugary drinks will shift to the left, from D1 to D2.

Recap

  • A shift in demand is caused by a change in a non-price factor.
  • Key factors include income, prices of related goods, tastes, population, and advertising.
  • An increase in demand is a shift to the right.
  • A decrease in demand is a shift to the left.
  • Substitute goods are rivals; complementary goods are used together.

Quick check

  1. If the price of coffee rises, what will happen to the demand for tea? What is the relationship between these goods?2 marks
  2. If consumer incomes fall during a recession, what will happen to the demand for luxury holidays (a normal good)?1 mark

5. Demand, Supply, and Market Equilibrium

In a free market, the price of a product is determined by the interaction of demand and supply. The point where the market demand curve and the market supply curve intersect is called the equilibrium. At this point, the price (the equilibrium price) is such that the quantity consumers are willing and able to buy is exactly equal to the quantity producers are willing and able to sell. This quantity is the equilibrium quantity.

If the market price is above equilibrium, there is an excess supply (or surplus), as suppliers want to sell more than consumers want to buy. This puts downward pressure on the price. If the price is below equilibrium, there is an excess demand (or shortage), as consumers want to buy more than suppliers are selling. This puts upward pressure on the price. These price pressures ensure the market tends to move towards equilibrium.

Key term

Equilibrium Price: The price at which the quantity demanded by consumers is exactly equal to the quantity supplied by producers, leaving no shortage or surplus.

Examiner insight

A complete analysis of a market change involves showing the initial equilibrium, the shift in one curve, and the new resulting equilibrium, clearly labelling all points (e.g., P1, Q1, P2, Q2) and explaining the transition process.

Common pitfall

Showing a shift in a curve (e.g., demand increases) but failing to explain how the resulting shortage or surplus leads to a price change and movements along the curves to the new equilibrium.

Worked example 15 marks

The demand and supply schedule for chocolate bars is given below.

Price (cents)Quantity demanded per monthQuantity supplied per month
50100,000420,000
40150,000300,000
30200,000200,000
20260,000120,000

a) What is the equilibrium price and quantity?b) Describe the situation in the market at a price of 40 cents and explain what will happen to the price.

  1. 1

    a) Step 1: To find equilibrium, look for the price where Quantity Demanded equals Quantity Supplied.

  2. 2

    a) Step 2: From the table, at a price of 30 cents, both quantity demanded and quantity supplied are 200,000 units. Therefore, the equilibrium price is 30 cents and the equilibrium quantity is 200,000 bars per month.

  3. 3

    b) Step 1: At a price of 40 cents, the quantity demanded is 150,000, while the quantity supplied is 300,000.

  4. 4

    b) Step 2: Since quantity supplied is greater than quantity demanded (Qs > Qd), there is an excess supply or surplus of 300,000 - 150,000 = 150,000 chocolate bars.

  5. 5

    b) Step 3: To clear their unsold stock, producers will be forced to lower their prices. This downward pressure on price will cause it to fall back towards the equilibrium level of 30 cents.

Recap

  • Equilibrium is found where the demand curve and supply curve intersect.
  • At equilibrium, quantity demanded equals quantity supplied.
  • If price is above equilibrium, there is an excess supply (surplus), pushing prices down.
  • If price is below equilibrium, there is an excess demand (shortage), pushing prices up.
  • Market forces naturally push prices towards equilibrium.

Quick check

  1. If quantity demanded is 500 units and quantity supplied is 300 units, is there a shortage or a surplus?1 mark

End-of-chapter exercise

Test yourself on the whole chapter. Work through these before moving on.

  1. Define 'effective demand' and explain why it is more important to a car manufacturer than a 'want'.3 marks
  2. Using a clearly labelled diagram, illustrate the 'law of demand' for smartphones.4 marks
  3. The price of coffee, a substitute for tea, falls significantly. Using a demand and supply diagram for the tea market, analyse the effect on the equilibrium price and quantity of tea.6 marks
  4. Explain the difference between a 'contraction in demand' and a 'decrease in demand', using a diagram for each.6 marks
  5. A clothing brand becomes extremely popular after being worn by a famous musician. Explain, using economic terms, what will happen to the demand curve for this brand's clothes.3 marks
  6. Consider the market for electric cars. If the government offers a subsidy to buyers, this increases demand. If technology improves, this increases supply. Using a diagram, analyse the combined effect of these two changes on the equilibrium price and quantity of electric cars.8 marks
  7. The table shows the market for ballpoint pens. Plot the demand and supply curves, identify the equilibrium price and quantity, and calculate the size of the shortage or surplus at a price of 150 cents. | Price (cents) | Demand per week | Supply per week | | :--- | :---: | :---: | | 300 | 100 | 500 | | 250 | 200 | 400 | | 200 | 300 | 300 | | 150 | 400 | 200 |7 marks
  8. Explain how a significant increase in consumer incomes might affect the demand for both restaurant meals (a normal good) and instant noodles (an inferior good).5 marks
  9. The price of printer ink cartridges doubles. Explain the likely impact on the demand for home printers. What is the economic term for the relationship between these two products?3 marks
  10. Analyse two distinct factors that could cause a leftward shift (a decrease) in the market demand for petrol.4 marks

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