Cambridge O Level2281

Demand

Economics 2281 Chapter Notes

What this chapter covers

Demand - Individual and market demandDemand - Movements along a demand curveDemand - Shifts of a demand curve
ShareWhatsAppPost
Demand notes

Unable to load PDF

The notes viewer could not load. Please refresh the page.

Read online free. Download a watermarked copy with a free account.

Read the notes

The full Demand notes as text: skim, search, and jump between subtopics.

~12 min read

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 Demand
  5. 5Price Elasticity of Demand (PED)

1. What is Demand?

In economics, 'demand' is more than just wanting something. It is the desire for a good or service, backed by the ability and willingness to pay for it. This is called 'effective demand'. For example, you might want a private jet, but unless you have the money to buy it, you are not part of the effective demand. We can look at the demand of a single person ('individual demand') or the total demand from all consumers in a market ('market demand'). Market demand is simply the sum of all individual demands for a particular product.

Key term

Effective Demand: The desire for a good or service backed by the financial ability to purchase it.

Common pitfall

Confusing a general 'want' for a product with the economic concept of 'effective demand', which requires the ability to pay.

Fun fact

The market demand for virtual goods, like skins in video games like Fortnite or special items in Roblox, is a multi-billion dollar industry, proving demand exists even for things that aren't physical.

Worked example 13 marks

A student says, 'I demand a new smartphone for my birthday.' An economist says this might not be 'effective demand'. Explain why the economist is correct.

  1. 1

    Step 1: Define effective demand. Effective demand is the desire for a product coupled with the ability to pay for it.

  2. 2

    Step 2: Apply to the scenario. The student has the desire (the 'want') for the smartphone.

  3. 3

    Step 3: Identify the missing component. However, the student may not have their own money to buy it. They are relying on someone else to pay.

  4. 4

    Step 4: Conclude. Therefore, from the student's perspective, it is only a 'want'. It only becomes effective demand for the person who has the money and is willing to buy it for them.

Recap

  • Demand is the willingness and ability to buy a product.
  • Effective demand means the desire to buy is backed by the money to do so.
  • Individual demand is one person's demand.
  • Market demand is the total demand from all consumers for a product.
  • Producers are primarily interested in market demand to make decisions.

Quick check

  1. What is the difference between individual demand and market demand?2 marks

2. The Law of Demand and the Demand Curve

The Law of Demand states that, ceteris paribus (meaning 'all other things being equal'), as the price of a good falls, the quantity demanded will rise. Conversely, as the price of a good rises, the quantity demanded will fall. This inverse relationship exists for two main reasons: the income effect (a lower price increases the purchasing power of your income) and the substitution effect (a lower price makes the good more attractive than other, now relatively more expensive, substitutes). We can represent this relationship visually using a demand curve, which is plotted from a demand schedule (a table of price and quantity data). The curve is always downward sloping from left to right.

Key term

Law of Demand: The principle that, ceteris paribus, there is an inverse relationship between the price of a good and the quantity demanded by consumers.

Examiner insight

Examiners award marks for correctly drawn and labelled diagrams. A downward sloping line labelled 'D' with 'Price' on the vertical axis and 'Quantity' on the horizontal axis is the minimum for showing a demand curve.

Common pitfall

Forgetting to label axes correctly on a diagram. Price (P) is always on the vertical y-axis and Quantity (Q) is on the horizontal x-axis.

Worked example 14 marks

The market demand schedule for packets of crisps per week is shown below.

Price (p)Quantity Demanded (000s)
80100
70150
60200
50250

(a) Plot the market demand curve.(b) What would be the quantity demanded at 55p?

  1. 1

    Step 1 (a): Draw the axes. Label the vertical axis 'Price (p)' and the horizontal axis 'Quantity Demanded (000s)'.

  2. 2

    Step 2 (a): Plot the points from the table. At 80p, plot 100. At 70p, plot 150. At 60p, plot 200. At 50p, plot 250.

  3. 3

    Step 3 (a): Join the points with a line or curve and label it 'D' (for Demand). The line should be downward sloping.

  4. 4

    Step 4 (b): To find the demand at 55p, find 55 on the price axis, move across to the demand curve, and then drop down to the quantity axis. This should be halfway between 200 and 250.

  5. 5

    Step 5 (b): State the answer. The quantity demanded at 55p is approximately 225,000 packets.

Recap

  • The Law of Demand states that as price rises, quantity demanded falls, and vice versa.
  • This assumes 'ceteris paribus' – all other factors remain unchanged.
  • A demand curve is a graphical representation of the demand schedule.
  • The demand curve slopes downwards from left to right.
  • Always label your axes correctly: Price on the vertical (Y) axis and Quantity on the horizontal (X) axis.

Quick check

  1. State the Law of Demand.1 mark
  2. What does the term 'ceteris paribus' mean?1 mark

3. Movements Along vs. Shifts in Demand

It is crucial to understand the difference between a change in 'quantity demanded' and a change in 'demand'. A change in the price of the good itself causes a movement along the existing demand curve. A fall in price causes an 'extension' or 'expansion' of demand (a movement down the curve). A rise in price causes a 'contraction' of demand (a movement up the curve). In contrast, a change in any non-price factor (like income or fashion) causes the entire demand curve to shift. An 'increase in demand' is a shift of the whole curve to the right. A 'decrease in demand' is a shift of the whole curve to the left. A shift means that at every single price, consumers now want to buy more (or less) than they did before.

Key term

Contraction in Demand: A movement up along the demand curve caused by an increase in the price of the good itself, leading to a fall in quantity demanded.

Examiner insight

Clear and accurate use of terminology is vital. Examiners will penalise students who write 'demand falls' when they mean 'quantity demanded falls' due to a price rise.

Common pitfall

The single most common mistake is confusing a shift in demand with a movement along the demand curve. Remember: Price change = Movement; Other factor change = Shift.

Worked example 16 marks

Using separate diagrams, illustrate and explain the difference between a 'contraction in demand' and a 'decrease in demand' for ice cream.

  1. 1

    Step 1: Draw the first diagram for 'Contraction'. Label axes P and Q, and draw a downward sloping demand curve D.

  2. 2

    Step 2: Show an initial point (P1, Q1). Then show a higher price (P2) and the corresponding lower quantity (Q2). Draw an arrow up the curve from the first point to the second.

  3. 3

    Step 3: Explain the 'Contraction' diagram. A rise in the price of ice cream from P1 to P2 causes a movement along the demand curve, leading to a fall in quantity demanded from Q1 to Q2. This is a contraction in demand.

  4. 4

    Step 4: Draw the second diagram for 'Decrease'. Label axes P and Q, and draw an initial demand curve D1.

  5. 5

    Step 5: Draw a second demand curve, D2, to the left of the first one. Draw an arrow pointing from D1 to D2.

  6. 6

    Step 6: Explain the 'Decrease' diagram. A decrease in demand is caused by a non-price factor, for example, a spell of cold weather. The entire demand curve shifts left from D1 to D2. This means at any given price (e.g., P1), less is demanded than before.

Recap

  • A change in the product's own price causes a MOVEMENT ALONG the demand curve.
  • A rise in price causes a contraction of demand (up the curve).
  • A fall in price causes an extension of demand (down the curve).
  • A change in any other factor (not price) 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.

Quick check

  1. What causes a movement along the demand curve?1 mark
  2. If demand for a product increases, does the demand curve shift left or right?1 mark

4. Causes of Shifts in Demand

A shift in the demand curve is caused by a change in any of the 'conditions of demand' (non-price factors). The main factors are:

  1. Income: For 'normal goods', as income rises, demand rises (shifts right). For 'inferior goods' (like cheap own-brand products), as income rises, demand falls (shifts left).
  2. Prices of Related Goods:
  • Substitutes: These are rival goods (e.g., Coke and Pepsi). If the price of a substitute rises, demand for the other good will rise (shift right).
  • Complements: These are goods used together (e.g., cars and petrol). If the price of a complement rises, demand for the other good will fall (shift left).
  1. Tastes and Fashion: If a product becomes more fashionable or advertising is effective, demand rises (shifts right).
  2. Population: A larger population or a change in its age structure will increase demand for many goods and services.
  3. Expectations: If consumers expect a future price rise, they may buy more now, causing current demand to shift right.

Key term

Substitutes: Goods that are in competition with each other, so that an increase in the price of one good will lead to an increase in demand for its rival.

Common pitfall

Mixing up substitutes and complements. Remember: Substitutes Replace (e.g., bus vs. train). Complements Complete (e.g., printer and ink).

Fun fact

The 'Veblen good' is a luxury item, like a Rolex watch or a designer handbag, that defies the law of demand. For these goods, a higher price can lead to higher demand because the price itself confers status.

Worked example 14 marks

The price of PlayStation consoles falls significantly. Using a diagram and a written explanation, analyse the likely effect on the market demand for PlayStation video games.

  1. 1

    Step 1: Identify the relationship. PlayStation consoles and PlayStation video games are complements; they are used together.

  2. 2

    Step 2: Draw the diagram. Draw axes for the market for video games (Price and Quantity). Draw an initial demand curve D1.

  3. 3

    Step 3: Determine the shift. A fall in the price of a complementary good (the console) will increase the demand for video games.

  4. 4

    Step 4: Show the shift on the diagram. Draw a new demand curve, D2, to the right of D1. Add an arrow showing the shift from D1 to D2.

  5. 5

    Step 5: Explain the diagram. The fall in the price of consoles makes owning one more affordable, leading more people to buy them. This increases the number of potential customers for video games. As a result, the demand for video games increases, shifting the demand curve to the right from D1 to D2. More games are now demanded at every price level.

Recap

  • A shift in demand is caused by a change in a non-price factor.
  • Key factors include changes in income, tastes, population, and the prices of related goods.
  • Substitutes are rival goods; complements are goods used together.
  • An increase in income raises demand for normal goods but lowers it for inferior goods.
  • Effective advertising can shift the demand curve to the right.

Quick check

  1. Are tea and coffee substitutes or complements?1 mark
  2. If a product is an 'inferior good', what happens to demand for it when incomes rise?1 mark

5. Price Elasticity of Demand (PED)

Price Elasticity of Demand (PED) measures how much the quantity demanded of a good responds to a change in its price. It tells us how 'stretchy' or sensitive demand is. We calculate it using a formula. The result tells us:

  • Price Inelastic (PED between 0 and -1): Quantity demanded is not very responsive to price changes. A big price change leads to only a small change in demand. Examples: petrol, salt. The demand curve is steep.
  • Price Elastic (PED less than -1, e.g., -1.5, -2): Quantity demanded is very responsive to price changes. A small price change leads to a big change in demand. Examples: a specific brand of chocolate bar with many substitutes. The demand curve is relatively flat.
  • Unitary Elastic (PED = -1): The percentage change in quantity demanded is exactly equal to the percentage change in price.

(Note: PED is always negative because of the inverse price-quantity relationship, but we often compare the absolute value).

PED = (% Change in Quantity Demanded) / (% Change in Price)

% Change = ((New Value - Old Value) / Old Value) * 100

Key term

Price Elasticity of Demand (PED): A measure of the responsiveness of the quantity demanded of a good to a change in its price.

Examiner insight

Examiners look for more than just the correct calculation. Marks are awarded for correctly identifying the result as 'elastic' or 'inelastic' and briefly explaining what this means in the context of the question.

Common pitfall

Calculating the percentage change using the new value as the denominator instead of the original value. Always use the formula: (New - Old) / Old.

Worked example 14 marks

When the price of a bus ticket is $2.00, 5,000 tickets are sold per day. When the price is raised to $2.50, 4,500 tickets are sold. Calculate the PED and state whether demand is price elastic or inelastic.

  1. 1

    Step 1: Calculate the percentage change in quantity demanded. %ΔQD = ((4500 - 5000) / 5000) * 100 = (-500 / 5000) * 100 = -10%.

  2. 2

    Step 2: Calculate the percentage change in price. %ΔP = ((2.50 - 2.00) / 2.00) * 100 = (0.50 / 2.00) * 100 = +25%.

  3. 3

    Step 3: Calculate PED using the formula. PED = %ΔQD / %ΔP = -10% / 25% = -0.4.

  4. 4

    Step 4: Interpret the result. The PED is -0.4. Since this value is between 0 and -1, demand is price inelastic. This means quantity demanded is not very responsive to the change in price.

Recap

  • PED measures the sensitivity of quantity demanded to a change in price.
  • PED = % Change in Quantity Demanded / % Change in Price.
  • If PED is between 0 and -1, demand is price inelastic (steep curve).
  • If PED is less than -1, demand is price elastic (flat curve).
  • Goods with few substitutes (like petrol) tend to be inelastic.
  • Luxury goods or goods with many substitutes tend to be elastic.

Quick check

  1. If a product's PED is -2.3, is its demand price elastic or inelastic?1 mark

End-of-chapter exercise

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

  1. Define 'effective demand' and give an example of a want that is not effective demand.2 marks
  2. Explain two reasons why the market demand curve for a normal good is typically downward sloping.4 marks
  3. Using a single, clearly labelled diagram, distinguish between a 'contraction in demand' and a 'decrease in demand'.6 marks
  4. The price of petrol rises. Using a demand and supply diagram for large, fuel-inefficient cars, explain the likely effect on the demand for these vehicles.4 marks
  5. The demand for a product is 10,000 units when its price is $5. When the price falls to $4, demand rises to 13,000 units. Calculate the price elasticity of demand (PED) for this product.3 marks
  6. Explain the difference between a 'normal good' and an 'inferior good', providing a clear example for each.4 marks
  7. Analyse two factors, other than a change in its own price, that could cause the market demand for holidays abroad to increase.4 marks
  8. A product has a PED of -0.5. The firm wants to increase its total revenue. Should it increase or decrease its price? Explain your answer.5 marks
  9. The government launches a successful health campaign highlighting the dangers of sugary drinks. At the same time, the price of sugar, a key ingredient, falls. Using a diagram, analyse the likely impact on the market for sugary drinks.6 marks
  10. 'A fall in the price of a good will always lead to an increase in total revenue for the producer.' Discuss this statement with reference to price elasticity of demand.8 marks

Go deeper

Practise and revise with member-only material for this chapter.

Workbook

Exam-style practice questions with full worked solutions.

Unlock with a plan

Chapter at a Glance

A single-page summary of every key idea for fast revision.

Unlock with a plan

Free notes are just the start.

Unlock every Workbook and Chapter at a Glance, and generate your own worksheets and predicted papers.

Explore plans

Related chapters

The nature of the basic economic problemFactors of productionOpportunity costProduction possibility curve (PPC) diagramsThe role of markets in allocating resourcesSupply