Chapter 3.1.2.1: The Demand for Goods and Services

Welcome to the core of market economics! This chapter is all about you—the consumer—and the choices you make. Understanding Demand is vital because it explains half of how prices are set in any market. Don't worry if diagrams seem intimidating; we will break down the demand curve concept into simple, manageable steps.

By the end of this section, you will understand what influences consumers' buying decisions and how those decisions are shown on a graph.


1. What is Demand? The Law of Demand

In Economics, demand is more than just wanting something. You must be able to afford it!

Demand is defined as the quantity of a good or service that consumers are willing and able to buy at various prices over a specific period.

The Law of Demand

This is one of the most fundamental principles in Economics. It describes the relationship between a good’s price and the quantity demanded.

  • As the price of a good increases, the quantity demanded decreases.
  • As the price of a good decreases, the quantity demanded increases.

This shows an inverse relationship between price (P) and quantity demanded (Qd).

Analogy: Imagine your favourite chocolate bar. If the price goes up dramatically, you will probably buy fewer (or switch to a cheaper alternative). If the price drops by half, you might buy two or three!

Why does this inverse relationship exist?

  1. The Income Effect: When the price of a good falls, consumers can afford to buy more of it with the same amount of money (their real income has increased).
  2. The Substitution Effect: When the price of a good falls, it becomes cheaper relative to other similar goods (substitutes), so consumers switch their purchases towards the cheaper good.

Key Takeaway: Demand requires both desire and purchasing power (willingness and ability).


2. The Demand Curve

A demand curve is a graphical representation showing the relationship between the price of a good and the quantity demanded over a period of time.

  • Price (P) is always placed on the vertical (Y) axis.
  • Quantity Demanded (Qd) is always placed on the horizontal (X) axis.

Because of the Law of Demand, the curve slopes downwards from left to right (negative slope).

Movements ALONG the Demand Curve

When the price of the good itself changes, we see a movement along the existing demand curve.

  • A fall in price causes an extension of demand (movement down the curve).
  • A rise in price causes a contraction of demand (movement up the curve).

!! Common Mistake Alert !!

Many students confuse a "movement along" with a "shift." Remember:

Movements Along the Curve are only caused by a change in the Price of the Good Itself. This results in a change in quantity demanded.

Key Takeaway: The demand curve is downward sloping, illustrating the Law of Demand. Only the good's own price causes movement along it.


3. Causes of Shifts in the Demand Curve (Non-Price Factors)

A shift in the demand curve occurs when consumers’ willingness and/or ability to buy the good changes without the price changing. These are called the determinants of demand or non-price factors.

A shift means that at *every* price level, a different quantity is now demanded. This results in a change in demand (not just quantity demanded).

  • A shift to the right means an increase in demand (consumers want more).
  • A shift to the left means a decrease in demand (consumers want less).
A. Factors Relating to Other Goods

The prices of related goods significantly influence demand:

i. The Price of Substitute Goods (\(P_{S}\))

Substitutes are goods that can be used instead of each other (e.g., butter and margarine, Pepsi and Coke).

  • If the price of a substitute rises, demand for the original good rises (shifts right). (If coffee becomes very expensive, people buy more tea.)
  • If the price of a substitute falls, demand for the original good falls (shifts left).
ii. The Price of Complementary Goods (\(P_{C}\))

Complements are goods that are usually consumed together (e.g., cars and petrol, printers and ink cartridges).

  • If the price of a complement rises, demand for the original good falls (shifts left). (If petrol becomes extremely expensive, people might drive less and demand fewer cars.)
  • If the price of a complement falls, demand for the original good rises (shifts right).
B. Factors Relating to Consumer Wealth and Income
i. Changes in Consumer Income (\(Y\))

How demand changes based on income depends on the type of good:

  • Normal Goods: Demand rises as income rises. (Most goods, like clothing, holidays, or restaurant meals.)
  • Inferior Goods: Demand falls as income rises. These are usually cheaper alternatives consumers use when money is tight. (Example: cheap supermarket brands, budget airlines, or public transport might be viewed as inferior to private car ownership.)
ii. Changes in Consumer Wealth

Wealth refers to the value of a person’s accumulated assets (like property, shares, or savings). While income is a flow of money, wealth is a stock.

  • If people feel wealthier (e.g., their house value increases), they often feel more secure and confident, leading to increased spending and a demand shift to the right.
C. Factors Relating to Tastes and Preferences
i. Individual Preferences and Tastes

A consumer’s desire for a product is affected by fashion, successful advertising, health concerns, and seasonality.

  • If a good becomes popular due to a celebrity endorsement, demand shifts right.
  • If health advice discourages consumption (e.g., sugar), demand shifts left.
ii. Social and Emotional Factors

The syllabus specifically highlights that spending decisions are influenced by social and emotional factors. This goes beyond simple taste:

  • Social Influence: The "bandwagon effect" (everyone is buying it, so I should too) or goods valued for their status (luxury brands). Increased social approval shifts demand right.
  • Emotional Influence: Decisions driven by impulse, fear (e.g., panic buying during a crisis), or nostalgia.
D. Other Factors
  • Expectations of Future Prices: If consumers expect the price of a good to rise next week, they will increase their current demand (shift right).
  • Demographics (Size and Structure of Population): An increase in population size increases overall market demand (shift right). A change in the age structure (e.g., an aging population) changes demand for specific goods (e.g., healthcare).

Quick Review: Movement vs. Shift

This is the most critical distinction to master:

Movement Along the Curve:
Cause: Change in Price of the Good Itself.
Result: Change in Quantity Demanded (Contraction/Extension).

Shift Of the Curve:
Cause: Change in any Non-Price Factor (Income, Wealth, Preferences, etc.).
Result: Change in Demand (Shift Right/Left).


Did you know?

The most famous theoretical exception to the Law of Demand is the Giffen Good. This is a rare inferior good where a price rise leads to an increase in demand because the income effect outweighs the substitution effect, forcing very poor consumers to substitute their consumption away from all other (more expensive) goods.

Key Takeaway: Non-price determinants shift the entire demand curve. Knowing whether a good is normal, inferior, a substitute, or a complement is essential for predicting the direction of the shift.