Demand
Two conditions must be met for demand to exist:
- Willingness: The consumer wants the product.
- Ability: The consumer has the money (purchasing power) to pay for it.
If you want a Ferrari but cannot afford it, there is no economic demand for that Ferrari at your current income level.
- Individual Demand: The quantity of a good one specific consumer is willing to buy at each price.
- Market Demand: The total quantity of the good that all consumers in the market are willing to buy at each price.
To find market demand, we sum the individual demands horizontally. For example, if Consumer A demands 2 units at 10 and Consumer B demands 3 units at10, the Market Demand is 5 units at $10.
- As Price (P) increases, Quantity Demanded (Q_d) decreases.
- As Price (P) decreases, Quantity Demanded (Q_d) increases.
This results in a demand curve that slopes downwards from left to right.
A movement along the demand curve occurs only when the price of the good itself changes. This is called a change in 'Quantity Demanded'.
- Extension: Price falls → Quantity demanded increases (move down/right along the curve).
- Contraction: Price rises → Quantity demanded decreases (move up/left along the curve).
Imagine a graph with Price (P) on the vertical axis and Quantity (Q) on the horizontal axis. Draw a downward-sloping line labeled D_1. Mark two points on this same line: Point A (higher price, lower quantity) and Point B (lower price, higher quantity). An arrow from A to B represents an extension; an arrow from B to A represents a contraction.
The Correction: When price changes, only the quantity demanded changes (movement along the curve). The demand curve itself does not move. You must distinguish between a change in quantity demanded (price cause) and a change in demand (non-price cause).
A shift of the demand curve occurs when a factor other than price changes. This is called a change in 'Demand'.
- Increase in Demand: The entire curve shifts to the right. Consumers want to buy more at every price.
- Decrease in Demand: The entire curve shifts to the left. Consumers want to buy less at every price.
Determinants of Demand (Causes of Shifts)
We use the acronym YTIPTEN to remember the non-price determinants:
- Yields/Tastes: Changes in consumer preferences or trends.
- Income: Changes in consumer income.
- Tastes/Preferences: (Often grouped with Yields) Health warnings, advertising, fashion.
- Population: Changes in the number of buyers.
- Expectations: Future price or income expectations.
- Number of buyers: Market size changes.
- Price of Related Goods: Substitutes and Complements.
Substitutes: Goods that can replace each other (e.g., Tea and Coffee).
- If Price of Substitute (P_{sub}) rises → Demand for our good increases (shifts right).
- If P_{sub} falls → Demand for our good decreases (shifts left).
Complements: Goods used together (e.g., Printers and Ink).
- If Price of Complement (P_{comp}) rises → Demand for our good decreases (shifts left).
- If P_{comp} falls → Demand for our good increases (shifts right).
Why examiners accept this: Examiners look for the transmission mechanism. You must link the determinant to consumer behavior. Do not just list 'Income'. Explain how income affects demand.
Correct Usage Example: 'An increase in consumer income leads to an increase in demand for normal goods because consumers have higher purchasing power and are willing to buy more at each price point.'
Incorrect Usage: 'Income goes up so demand goes up.' (Too vague).
- Axes labelled Price (P) and Quantity (Q).
2. Downward sloping Demand curve (D_1) and upward sloping Supply curve (S_1) intersecting at equilibrium E_1.
3. Demand curve shifts to the right (from D_1 to D_2).
4. New equilibrium E_2 shows higher Price (P_2 > P_1) and higher Quantity (Q_2 > Q_1).
The Correction: The Law of Demand holds ceteris paribus. If the price of a good falls but consumer income also crashes, or a new health study says the good is toxic, the demand curve might shift left so much that quantity demanded actually falls despite the lower price. Always specify which factor is changing.
Why examiners accept this: Marks are awarded for precision. A shifted curve must be clearly distinct from the original. Equilibrium points must be marked.
Correct Usage Example: Draw D_1 and S_1. Label axes 'Price' and 'Quantity'. Show an arrow pointing right from D_1 to a new line D_2. Mark the intersection of D_1/S_1 as E_1 and D_2/S_1 as E_2. Draw dashed lines from E_1 and E_2 to the axes to show P_1, Q_1 and P_2, Q_2.
- Increase in consumer income: Luxury cars are normal goods (or inferior? No, normal/luxury). Higher income increases purchasing power for high-end items.
2. Change in tastes/preferences: A trend towards status symbols or improved advertising campaigns highlighting the prestige of the brand.
Correction: The question asks why it causes a decrease. This would be incorrect unless they are complements (which they are not). If the question implies a decrease, check if the goods are complements. If they are substitutes, a rise in sugar price increases demand for sweeteners.