Markets & Demand

Economics: IB Diploma, topic 1.1.1

The Relationship Between Price and Quantity Demanded

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

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 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.

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.

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.

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

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.

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).

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)?
If you increase the price of a good, what will happen to the quantity demanded of its complement good?
How would a rise in price for a normal good affect demand?