1.2.2

Demand

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The Relationship Between Price and Quantity Demanded

The demand curve illustrates the relationship between quantity demanded and price.

Price and quantity demanded

Price and quantity demanded

  • Price is what the buyer pays for a specific good or service.
  • Quantity demanded is the total number of units purchased at that price.
  • The demand curve is downward sloping and shows the relationship between price and quantity.
    • This means that the higher the price is, the lower demand is.
  • The law of demand shows the inverse relationship between price and quantity, assuming all other variables are constant.
Willingness and ability to pay

Willingness and ability to pay

  • Willingness to pay - desire to pay based on tastes and preferences.
  • Ability to pay - factors in a person's income, and whether they can afford the good or service or not.
Substitutes and complements

Substitutes and complements

  • Substitute goods - an increase in the price of one good will increase the quantity demanded of the other good.
    • E.g Persil and Ariel washing pods.
  • Complement goods - an increase in the price of one good will cause a decrease in the quantity demanded of the other good.
  • E.g flights to Spain and suncream.
Income and substitution effects

Income and substitution effects

  • Two theories that explain the relationship between price and quantity are:
    • Income effect - when prices fall, consumers can afford a greater quantity of goods and services (assuming income is fixed). So demand for these goods and services increases.
    • Substitution effect - when the price of one good falls, consumers will buy more of the cheaper good or service and less of the more costly good or service. So demand for the cheaper good will increase; demand for the costlier good decreases.

Shifts in the Demand Curve

There are a number of factors that can cause the demand curve to shift.

Change in demand

Change in demand

  • The demand curve will shift right when there is an increase in demand for the good at each price level.
    • E.g if a product were to suddenly become more popular, the demand curve would shift right.
  • The demand curve will shift left when there is a decrease in demand for the good at each price level.
Change in income

Change in income

  • The effect of a change in income depends on the type of good.
  • For a normal good, increased income will lead to an increase in quantity demanded.
    • E.g new cars.
  • For an inferior good, increased income may lead to a reduction in quantity demanded.
    • E.g rice (if more expensive products like meat can be afforded).
Changes in prices cause a move along the curve

Changes in prices cause a move along the curve

  • Movements along the curve happen in response to a price change.
    • A rise in price will lead to a demand contraction.
    • A fall in price will lead to a demand expansion.

Diminishing Marginal Returns

Diminishing marginal returns is the concept that the more of something you add, the lower the impact of each additional unit, assuming all else is fixed.

The law of diminishing marginal utility

The law of diminishing marginal utility

  • Marginal utility is the extra benefit to an individual of consuming a good or service.
  • The law of diminishing marginal utility states that the more an individual consumes (ceteris paribus) the utility of the good/service decreases with every additional unit consumed.
Example of diminishing marginal utility

Example of diminishing marginal utility

  • Diminishing marginal utility.
  • The first slice of Domino's pizza is very satisfying, but the 100th may not be quite as enjoyable.
  • Your tastes can be satiated (you can have enough of something). Eventually, the marginal utility of another slice of pizza may be negative.
The demand curve

The demand curve

  • The law of diminishing marginal returns can explain why the demand curve slopes downwards. As the quantity purchased rises, the price that consumers are willing to pay falls.
  • Consumers may be willing to pay a lower price for a higher volume because they gain less utility (or satisfaction) from each extra unit.
Jump to other topics
1

Introduction to Markets

1.1

Nature of Economics

1.1.1Economics as a Social Science1.1.2Positive & Normative Economic Statements1.1.3The Economic Problem1.1.4Resources1.1.5Production Possibility Frontiers1.1.6Specialisation & Division of Labour1.1.7Types of Economies1.1.8End of Topic Test - Nature of Economics1.1.9Application Questions - Nature of Economics
1.2

How Markets Work

1.2.1Rational Decision Making1.2.2Demand1.2.3Elasticities of Demand1.2.4Elasticities of Demand 21.2.5Elasticity & Revenue1.2.6Supply1.2.7Elasticity of Supply1.2.8Price Determination1.2.9Price Mechanism1.2.10Consumer & Producer Surplus1.2.11Indirect Taxes & Subsidies1.2.12A-A* (AO3/4) - Taxing Prices or Quantities?1.2.13Alternative View of Consumer Behaviour1.2.14End of Topic Test - Markets1.2.15A-A* (AO3/4) - Markets
2

Market Failure

2.1

Market Failure

2.1.1Types of Market Failure2.1.2Externalities2.1.3The Deadweight Welfare Loss of Externalities2.1.4A-A* (AO3/4) - The Externalities of Education2.1.5Public Goods2.1.6Information Gaps2.1.7End of Topic Test - Market Failure2.1.8Application Questions - Market Failure
2.2

Government Intervention

2.2.1Government Intervention in Markets2.2.2Subsidies & Price Controls2.2.3Pollution Permits & Regulation2.2.4A-A* (AO3/4) - European Emissions Trading2.2.5State Provision & Information Provision2.2.6Government Failure2.2.7End of Topic Test - Government Intervention2.2.8A-A* (AO3/4) - Government Intervention
3

The UK Macroeconomy

3.1

Measures of Economic Performance

3.1.1Measuring Economic Growth3.1.2National Income Data3.1.3Inflation3.1.4Causes of Inflation3.1.5Consequences of Inflation3.1.6Employment & Unemployment3.1.7Causes & Impact of Unemployment3.1.8A-A* (AO3/4) - Hysteresis3.1.9Balance of Payments3.1.10Current Account Deficit & Imbalances3.1.11End of Topic Test - Economic Performance3.1.12Application Questions Macroeconomy
3.2

Aggregate Demand

3.2.1Aggregate Demand3.2.2Consumption3.2.3Investment3.2.4Government Expenditure3.2.5Net Trade3.2.6End of Topic Test - Aggregated Demand3.2.7Application Questions - AD
3.3

Aggregate Supply

3.3.1Aggregate Supply3.3.2End of Topic Test - Aggregated Supply3.3.3A-A* (AO3/4) -Aggregate Supply
3.4

National Income

3.4.1National Income3.4.2Injections & Withdrawals3.4.3Equilibrium Level of Real National Output3.4.4Multiplier Effect3.4.5End of Topic Test - National Income3.4.6Application Questions - National Income
3.5

Economic Growth

3.5.1Causes of Economic Growth3.5.2Output Gaps3.5.3Business Cycle3.5.4Impact of Economic Growth3.5.5End of Topic Test - Economic Growth3.5.6A-A* (AO3/4) - Growth
4

The UK Economy - Policies

4.1

Macroeconomic Objectives & Policies

4.1.1Possible Objectives4.1.2Demand-Side Policies - Monetary4.1.3Demand-Side Policies - Monetary 24.1.4A-A* (AO3/4) - The Future of Interest Rates4.1.5Demand-Side Policies - Fiscal4.1.6Demand-Side Policies in 2007-084.1.7Strengths & Weaknesses of Demand Side4.1.8Supply-Side Policies4.1.9Supply-Side Policies 24.1.10Conflicts Between Objectives4.1.11A-A* (AO3/4) - Conflicting Incentives4.1.12Phillips Curve4.1.13End of Topic Topic - Policies & Objectives4.1.14Application Questions - UK Policies
5

Business Behaviour

5.1

Business Growth

5.1.1Size & Types of Firms5.1.2Business Growth5.1.3Pros & Cons of External Expansion5.1.4Demergers5.1.5End of Topic Test - Business Growth5.1.6A-A* (AO3/4) - Business Growth
5.2

Business Objectives

5.2.1Business Objectives5.2.2End of Topic Test - Business Objectives5.2.3Application Questions - Business Objectives
5.3

Revenues, Costs & Profits

5.3.1Revenue5.3.2Costs5.3.3Economies & Diseconomies of Scale5.3.4Profits5.3.5Profits 25.3.6End of Topic Test - Revenue, Costs & Profits5.3.7A-A* (AO3/4) - Revenue, Costs & Profit
6

Market Structures

6.1

Market Structures

6.1.1Efficiency6.1.2Perfect Competition6.1.3Perfect Competition 26.1.4Monopolistic Competition6.1.5Oligopolies6.1.6The Prisoner's Dilemma6.1.7Collusion in Oligopolistic Markets6.1.8A-A* (AO3/4) - Which Factors Affect Collusion?6.1.9Monopolies6.1.10Price Discrimination6.1.11Monopsony6.1.12A-A* (AO3/4) - Models in Economics6.1.13Contestability6.1.14Benefits of Contestability6.1.15End of Topic Test - Market Structures6.1.16Application Questions - Market Structures6.1.17A-A* (AO3/4) - Cereal Collusion
6.2

Labour Market

6.2.1Demand for Labour6.2.2Supply of Labour6.2.3Labour Market Imperfections6.2.4A-A* (AO3/4) - Labour Productivity & Unemployment6.2.5A-A* (AO3/4) - What Level of Unionisation is Good?6.2.6Wage Determination6.2.7Elasticity of Labour Supply & Demand6.2.8Intervention in Setting Wages6.2.9End of Topic Test - Labour Market6.2.10A-A* (AO3/4) - Labour Markets
6.3

Government Intervention

6.3.1Reasons for Government Intervention6.3.2Government Promotion of Competition6.3.3Usefulness of Competition Policy & Examples6.3.4A-A* (AO3/4) - Modern Competition Policy6.3.5Privatisation6.3.6Government Regulation6.3.7A-A* (AO3/4) - Nationalisation vs Privatisation6.3.8Government Protection of Suppliers and Employees6.3.9Impact of Government Intervention6.3.10End of Topic Test - Government Intervention6.3.11Application Questions - Government Intervention
7

A Global Perspective

7.1

International Economics - Globalisation & Trade

7.1.1Globalisation7.1.2Globalisation for LEDCs7.1.3Globalisation for MEDCs7.1.4Specialisation & Trade7.1.5Pattern of Trade7.1.6Terms of Trade7.1.7Trading Blocs7.1.8UK, EU & WTO7.1.9End of Topic Test - Globalisation & Trade7.1.10A-A* (AO3/4) - Globalisation & Trade
7.2

International Economics - Currency

7.2.1Merged Currency7.2.2Restrictions on Free Trade7.2.3Arguments for Protectionism7.2.4Arguments Against Protectionism7.2.5Balance of Payments7.2.6Balance of Payments 27.2.7Floating Exchange Rates7.2.8Fixed Exchange Rate7.2.9International Competitiveness7.2.10End of Topic Test - International Economy7.2.11Application Questions - International Economics
8

Finance & Inequality

8.1

Poverty & Inequality

8.1.1Absolute & Relative Poverty8.1.2Inequality8.1.3Inequality 28.1.4Lorenz Curve8.1.5Government Policy on Poverty8.1.6End of Topic Test - Poverty & Inequality8.1.7A-A* (AO3/4) - Inequality & Poverty
8.2

Emerging & Developing Economies

8.2.1Measures of Development8.2.2Factors Influencing Growth & Development8.2.3Barriers to Development8.2.4Barriers to Development 28.2.5A-A* (AO3/4) - The Bottom Billion8.2.6Development Strategies8.2.7Interventionist Strategies8.2.8Aid8.2.9International Institutions8.2.10International Institutions 28.2.11End of Topic Test - Emerging & Developing8.2.12Application Questions - Developing Countries
8.3

The Financial Sector

8.3.1Role of Financial Markets8.3.2Market Failure in the Financial Sector8.3.3Role of Central Banks8.3.4End of Topic Test - The Financial Sector8.3.5A-A* (AO3/4) - Financial Sector
8.4

Role of the State in the Macroeconomy

8.4.1Public Expenditure8.4.2Taxation8.4.3Public Sector Finances8.4.4End of Topic Test - Role of the State8.4.5Application Questions - Role of the State
9

Examples of Global Policy

9.1

International Policies

9.1.1Global Debt & Deficit Policies9.1.2Poverty & Inequality Policies9.1.3Changes in Interest Rates9.1.4Competitiveness Policies9.1.5End of Topic Test - International Policies9.1.6A-A* (AO3/4) - International Policies
9.2

Policy Responses to Shocks

9.2.1International Tax Policies9.2.2Problems for Policymakers9.2.3End of Topic Test - Policy Responses9.2.4Application Questions - Policy Responses

Practice questions on Demand

Can you answer these? Test yourself with free interactive practice on Seneca — used by over 10 million students.

  1. 1
    The price of flights to Spain drop dramatically. What would we expect to happen to the quantity of flights demanded to Greece (all other things being equal)?Multiple choice
  2. 2
    If you increase the price of a good, what will happen to the quantity demanded of its complement good?Multiple choice
  3. 3
    How would a rise in price for a normal good affect demand?Multiple choice
  4. 4
    What is level of consumption determined by?Fill in the list
  5. 5
    <b>Which economic concept does this describe?</b> <br> "The more of an input you add, the lower the impact of each additional unit, assuming all else is fixed"Multiple choice
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Rational Decision Making

Elasticities of Demand