1.1.1

Markets & Demand

Test yourself on Markets & Demand

Test your knowledge with free interactive questions on Seneca — used by over 10 million students.

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.
    • 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.
  • 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.
Jump to other topics
1

Microeconomics

1.1

Competitive Markets: Demand & Suply

1.1.1Markets & Demand1.1.2Diminishing Marginal Returns1.1.3Supply1.1.4Market Equilibrium1.1.5Price Mechanism1.1.6Consumer & Producer Surplus1.1.7IB Multiple Choice - Demand1.1.8IB Multiple Choice - Supply
1.2

Elasticity

1.2.1Elasticities of Demand1.2.2Factors Affecting Price Elasticity of Demand1.2.3Elasticity of Supply1.2.4Price Elasticity of Supply1.2.5IB Multiple Choice - Price Elasticity of Demand1.2.6IB Multiple Choice - Price Elasticity of Supply1.2.7IB Multiple Choice - Other Elasticities
1.3

Government Intervention

1.3.1Indirect Taxes & Subsidies1.3.2Application Question - Taxing Prices or Quantities1.3.3Subsidies & Price Controls1.3.4Deadweight Loss & Government Intervention1.3.5Elasticity & Tax Incidence1.3.6IB Multiple Choice - Government Intervention
1.4

Market Failure

1.4.1Types of Market Failure1.4.2Introduction to Externalities1.4.3Negative Externalities1.4.4Policy for Negative Externalities1.4.5Positive Externalities1.4.6The Deadweight Welfare Loss of Externalities1.4.7Case Study - The Externalities of Education1.4.8Public Goods & the Free-Rider Problem1.4.9Asymmetric Information1.4.10End of Topic Test - Market Failure1.4.11Application Questions - Market Failure
1.5

HL: Theory of the Firm & Market Structures

1.5.1Theory of the Firm & Market Structures
2

Macroeconomics

2.1

The Level of Overall Economic Activity

2.1.1The Circular Flow of Income2.1.2Defining GDP2.1.3Limitations of GDP2.1.4IB Multiple Choice - Economic Indicators2.1.5Business Cycles2.1.6Output Gaps
2.2

Aggregate Demand & Aggregate Supply

2.2.1The Aggregate Demand Curve2.2.2Components of Aggregate Demand2.2.3Shape of the Aggregate Demand Curve2.2.4Shifts in Aggregate Demand2.2.5IB Multiple Choice - Aggregate Demand2.2.6Short & Long-Run Aggregate Supply2.2.7Alternative Models of LRAS2.2.8Equilibrium in the AD-AS Model2.2.9Output Gaps & the AD-AS Model
2.3

Macroeconomic Objectives

2.3.1Introduction to Unemployment2.3.2Limitations of Unemployment2.3.3Types of Unemployment2.3.4Causes & Impact of Unemployment2.3.5Defining Inflation2.3.6Measuring Inflation2.3.7Use of Index Numbers2.3.8The Consumer Price Index2.3.9Consequences of Inflation2.3.10Causes of Inflation2.3.11Inflation & Unemployment Tradeoff2.3.12The Short-Run Phillips Curve2.3.13The Long-Run Phillips Curve
2.4

Economic Growth, Poverty & Inequality

2.4.1Measuring Economic Growth2.4.2Determinants of Productivity2.4.3Economic Growth & Productivity2.4.4Absolute & Relative Poverty2.4.5Inequality2.4.6Inequality 22.4.7Lorenz Curve2.4.8Government Policy on Poverty2.4.9End of Topic Test - Poverty & Inequality2.4.10Application - Inequality & Poverty
2.5

Fiscal Policy

2.5.1Introduction to Fiscal Policy2.5.2Fiscal Policy and AD-AS Model2.5.3Fiscal Policy Lags2.5.4Automatic Stabilizers2.5.5IB Multiple Choice - Fiscal Policy
2.6

Monetary Policy

2.6.1Objectives of Monetary Policy2.6.2Monetary Policy Implementation2.6.3Monetary Policy & AD-AS Model2.6.4Monetary Policy Lags & Pitfalls
2.7

Supply-Side Policies

2.7.1Supply-Side Policies2.7.2Supply-Side Policies 2
3

The Global Economy

3.1

International Trade

3.1.1Globalisation3.1.2Globalisation for LEDCs3.1.3Globalisation for MEDCs3.1.4Comparative Advantage & Trade3.1.5Protectionism3.1.6Arguments for Protectionism3.1.7Arguments Against Protectionism3.1.8End of Topic Test - Globalisation & Trade3.1.9Case Study - Globalisation & Trade
3.2

Exchange Rates

3.2.1Floating Exchange Rates3.2.2Fixed Exchange Rate3.2.3Effect of a Stronger & Weaker Dollar
3.3

The Balance of Payments

3.3.1Balance of Payments3.3.2Balance of Payments 23.3.3FDI & Reducing a BoP Deficit
3.4

Economic Integration

3.4.1Customs Unions & WTO3.4.2Merged Currency
3.5

Terms of Trade

3.5.1Absolute & Comparative Advantage3.5.2Gains from Trade3.5.3Terms of Trade3.5.4IB Multiple Choice - Comparative Advantage & Trade
3.6

Economic Development

3.6.1Factors Influencing Growth & Development3.6.2International Institutions3.6.3Measures of Development3.6.4Barriers to Development3.6.5Case Study - The Bottom Billion3.6.6End of Topic Test - Emerging & Developing
3.7

The Role of Domestic & International Factors

3.7.1Interventionist Strategies3.7.2Development Strategies3.7.3Development Promotion Policies3.7.4End of Topic Test - Growth & Global Development3.7.5Application Questions -Growth & Global Development
3.8

The Role of International Trade

3.8.1International Institutions3.8.2End of Topic Test - Globalisation & Trade
3.9

The Role of Foreign Aid

3.9.1Aid3.9.2Limitations of Aid3.9.3Support for Aid3.9.4Application Questions - Developing Countries

Practice questions on Markets & 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
Answer all questions on Markets & Demand

Unlock your full potential with Seneca Premium

  • Unlimited access to 10,000+ open-ended exam questions

  • Mini-mock exams based on your study history

  • Unlock 800+ premium courses & e-books

Get started with Seneca Premium

Diminishing Marginal Returns