2.2. Demand
- Syllabus
- 0455–2027–2028
- Topic
- 2.2
- Level
- —
Learning objectives
2.2.1Individual and market demand• definition of demand• link between individual demand and market demand• drawing and interpretation of the demand diagram2.2.2Movements along a demand curve• causes of extensions and contractions in demand• diagrams that illustrate movements along a demand curve2.2.3Shifts of a demand curve• causes of decreases and increases in demand• diagrams that illustrate shifts of a demand curve
Build individual and market demand
Demand is the willingness and ability of consumers to buy a product at a given price over a given period. An individual demand schedule records one consumer's planned quantity at each price; market demand combines all consumers' plans.
To find market demand, add the quantities demanded by every consumer at the same price. This is horizontal addition: prices stay aligned while quantities are summed.
| Price ($) | Buyer A | Buyer B | Market quantity demanded |
|---|---|---|---|
| 10 | 2 | 3 | 5 |
| 6 | 5 | 7 | 12 |
| 2 | 9 | 11 | 20 |
On a demand diagram, price is on the vertical axis and quantity demanded on the horizontal axis. Plot each price–quantity pair and join the points. The curve normally slopes downward: with other conditions unchanged, a lower price is associated with a greater quantity demanded.
Demand is not simply wanting a product: the consumer must also be able to buy it. A demand curve varies the product's own price while holding non-price conditions such as income, tastes and related-goods prices constant.
Trace extensions and contractions in demand
A change in the product's own price causes a movement along the existing demand curve, because the relationship between price and quantity demanded is being read while all non-price conditions are held constant.
| Own-price change | Movement | Quantity demanded | Diagram direction |
|---|---|---|---|
| price falls | extension in demand | increases | down and right along the same curve |
| price rises | contraction in demand | decreases | up and left along the same curve |
If the price falls from 8to5 and planned purchases rise from 40 to 65 units, the extra 25 units are an extension in demand. The curve has not shifted: two different points on the same demand curve are being compared.
Do not call an extension an 'increase in demand' or a contraction a 'decrease in demand'. In this syllabus language, increase/decrease in demand means the whole curve shifts because a non-price determinant changes.
Explain increases and decreases in demand
A non-price determinant changes the quantity consumers plan to buy at every possible price, so the entire demand curve shifts. A rightward shift is an increase in demand; a leftward shift is a decrease in demand.
| Change | Likely demand shift for the product | Why |
|---|---|---|
| consumer income rises (normal good) | right | consumers can afford more |
| population or number of buyers rises | right | more consumers contribute to market demand |
| tastes, quality information or advertising become more favourable | right | willingness to buy increases |
| price of a substitute rises | right | consumers switch toward this product |
| price of a complement rises | left | using the pair becomes more expensive, reducing demand for this product |
Keep price on the vertical axis and quantity on the horizontal axis. Draw the original curve D1. For an increase, draw D2 to the right; at the same price, quantity demanded is higher. For a decrease, draw D2 to the left; at the same price, quantity demanded is lower.
Reverse changes usually reverse the shift: fewer buyers, less favourable tastes, a cheaper substitute or a more expensive complement reduce demand. For an inferior good, the income effect may run opposite to the normal-good example, so state the assumption when income changes.
A change in production cost or the number of firms changes supply, not demand. A change in this product's own price causes a movement along demand, not a shift. Identify whose behaviour changes and whether the cause is price or non-price.