Hello IGCSE Economists! Studying Demand
Welcome to the chapter on **Demand**! This is one of the most fundamental concepts in Economics, especially when discussing Section 2: The Allocation of Resources.
Why is demand so important? Because in a market economy, decisions about what to produce, how to produce, and for whom to produce are mainly answered by looking at what people want (Demand) and what businesses are willing to sell (Supply). Understanding demand helps us see how resources are automatically allocated via the **price mechanism**.
Don't worry if diagrams seem tricky at first. We will break down every step, focusing on clear definitions and real-life examples!
1. What Exactly is Demand? (Definition)
In everyday language, if you want a new phone, you say you "demand" it. But in Economics, the definition is much stricter.
Key Definition: Demand
Demand is defined as the willingness and ability of consumers to purchase a good or service at various possible prices over a given period of time.
- Willingness: You must genuinely want the product (e.g., you really like that brand of trainers).
- Ability: You must have the money (the purchasing power) to pay for it.
Analogy: If you want a luxury sports car (willingness) but only have enough money for a bicycle (no ability), you do not create economic demand for the car.
Key Takeaway: Demand requires both desire and money. Without both, it's just a wish!
2. The Law of Demand: Price and Quantity
This section explores the relationship between the price of a product and how much of it consumers want to buy. This is often called the Law of Demand (Syllabus 2.3.2).
The Inverse Relationship
The Law of Demand states that, assuming everything else remains the same (ceteris paribus), as the price of a good or service rises, the quantity demanded will fall, and vice versa.
This relationship is inverse or negative. Consumers buy less when the price is high and buy more when the price is low. Why?
- The Income Effect: When the price of a product falls, your real income (your purchasing power) increases. You can buy more of that product (and maybe others) without earning more money.
- The Substitution Effect: When the price of a product falls, it becomes relatively cheaper compared to its substitutes. Consumers switch from the substitute product to the now cheaper product.
The Crucial Condition: Ceteris Paribus
When economists discuss the Law of Demand, we must always mention the phrase: Ceteris Paribus.
Ceteris Paribus is a Latin phrase meaning "all other things being equal" or "holding all other factors constant."
Example: When we say a lower price leads to higher quantity demanded, we assume that consumers' income, tastes, and the price of related goods haven't changed.
3. The Demand Curve Diagram
We use a diagram to illustrate the Law of Demand. The relationship is so consistent that the curve always looks the same.
Features of the Demand Curve
The standard demand curve (labelled 'D') is drawn with:
- Price (P) on the vertical (Y) axis.
- Quantity Demanded (Qd) on the horizontal (X) axis.
- It slopes downwards from left to right, reflecting the inverse relationship between P and Qd.
Did you know? The downward slope is exactly what illustrates the Law of Demand!
4. Movements Along the Demand Curve (2.3.2)
When the price of the good itself changes, we see a **movement along** the existing demand curve. This movement is a change in the Quantity Demanded.
There are two types of movements:
1. Extension in Demand
This occurs when the price of the good falls, leading to a rise in the Quantity Demanded.
- On the diagram, this is a movement downwards along the curve.
2. Contraction in Demand
This occurs when the price of the good rises, leading to a fall in the Quantity Demanded.
- On the diagram, this is a movement upwards along the curve.
🛑 Common Mistake Alert!
Students often mix up "Demand" and "Quantity Demanded."
Change in PRICE = Change in Quantity Demanded (Movement along the curve).
Change in NON-PRICE factors = Change in Demand (Shift of the curve).
5. Individual Demand vs. Market Demand (2.3.3)
Economists look at demand on two levels:
1. Individual Demand
This is the demand from **one single consumer** for a specific product at various prices.
2. Market Demand
This is the total demand for a product or service from all consumers in the market.
The link between the two is called Aggregation.
Aggregation Step-by-Step:
- Take the quantity demanded by Consumer A at a specific price.
- Take the quantity demanded by Consumer B at the same price.
- Add them together (and include all other consumers, C, D, E, etc.).
- The result is the **Market Demand** at that price.
Example: If a cinema ticket costs $10, and Student A demands 2 tickets per month and Student B demands 3 tickets per month, the market demand (assuming only A and B exist) is 5 tickets at $10.
Key Takeaway: The market demand curve is simply the horizontal summation (adding up) of all individual demand curves.
6. Shifts in the Demand Curve (2.3.4)
A change in any factor *other than the product's own price* will cause the entire demand curve to shift. This is a change in **Demand** (not Quantity Demanded).
Increase in Demand (Shift to the Right)
If demand increases, consumers are willing and able to buy more quantity at every possible price. The demand curve shifts right (D1 to D2).
Decrease in Demand (Shift to the Left)
If demand decreases, consumers are willing and able to buy less quantity at every possible price. The demand curve shifts left (D1 to D3).
7. The Conditions of Demand (The Shift Factors)
These are the **non-price determinants** that cause the entire demand curve to shift (Syllabus 2.3.4). We can remember these using the acronym T.I.P.E.S.
T: Tastes and Preferences
If a product becomes fashionable, popular due to advertising, or receives positive media attention, demand increases (shifts right). If a product is subject to a health warning, demand decreases (shifts left).
Example: If a celebrity endorses a certain brand of soft drink, demand for that drink will increase.
I: Income of Consumers
Changes in income greatly affect purchasing ability.
- Normal Goods: As income rises, demand for normal goods (like brand-name clothing or holidays) rises.
- Inferior Goods: As income rises, demand for inferior goods (like cheap instant noodles or second-hand clothes) falls, because people can now afford better alternatives.
P: Price of Related Goods
Related goods come in two types: substitutes and complements.
Substitutes
Goods that can be used in place of one another (e.g., Coke and Pepsi, tea and coffee).
- If the price of Pepsi rises, consumers switch to Coke. Demand for Coke increases (shifts right).
Complements
Goods that are typically consumed together (e.g., cars and petrol, printers and ink cartridges).
- If the price of printers rises, fewer people buy printers, so demand for ink cartridges decreases (shifts left).
E: Expectations of Future Price Changes
If consumers expect the price of a good to rise in the future, they will buy it now (Demand increases, shift right). If they expect the price to fall, they wait (Demand decreases, shift left).
Example: If a government announces a new tax on cigarettes starting next month, people buy more cigarettes today.
S: Size and Structure of the Population
The number of consumers in the market:
- A rise in population (e.g., due to immigration or high birth rates) usually leads to an increase in demand for most goods.
- A change in the population structure (e.g., more elderly people) will increase demand for certain goods (like healthcare) and decrease demand for others (like toys).
Quick Review Box: Demand Changes
Movement along the curve: ONLY caused by a change in the good's **PRICE**. (Change in Quantity Demanded: Extension or Contraction)
Shift of the curve: Caused by a change in the **Conditions of Demand** (T.I.P.E.S.). (Change in Demand: Increase or Decrease)
You have mastered the foundational concepts of demand! This knowledge is vital for understanding how markets achieve equilibrium, which we will explore in later sections.