7 Demand

By the end of this chapter, students should be able to:

★ define demand
★ draw and interpret appropriate demand diagrams
★ explain movements (contractions and expansions) along a demand curve
★ explain the link between individual and market demand
★ explain the causes of shifts in a demand curve.

Demand
Definition
Demand refers to both the willingness and the ability of customers to pay a given
price to buy a good or service. This is sometimes referred to as effective demand
Demand refers to the
willingness and the ability
to distinguish genuine demand from a desire to buy something.
of customers to pay a The amount of a good or service demanded at each price level is called the
given price to buy a good quantity demanded. In general, the quantity demanded falls as price rises,
or service. The higher the while the quantity demanded rises at lower prices. Hence, there is an inverse
price of a product, the relationship between the price of a good or service and the quantity demanded.
lower its demand tends
This rule is known as the law of demand. There are two reasons for this
to be.
relationship:
» As the price of a good or service falls, the customer’s real income rises — that
is, with the same amount of income, the customer is able to buy more products
at lower prices.
» As the price of a good or service falls, a higher number of customers are able to
pay, so they are more likely to buy the product.

Activity
Choose an item that you can buy in your country.
1 What are the factors that affect the demand for this product?
2 Which factor is the most important? Why?
Produce your findings in an A3 poster format for displaying in the classroom.

Determinants of demand
Study tip Although price is regarded as the key determinant of the level of demand for a
Some of the non-price good or service, it is not the only factor that affects the quantity demanded.
determinants of demand Other determinants of demand can be remembered by the acronym HIS AGE:
can be remembered by the
acronym MISC: marketing,
» Habits, fashions and tastes — changes in habits, fashions and tastes can
income, substitutes and affect the demand for all types of goods and services. When products become
complements. fashionable (such as smartphones) this leads to an increase in demand for
them, whereas those that become unfashionable (such as last season’s clothes)
have a reduced level of demand.

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Demand

▲ Fashionable products experience an increase in demand

» Income — higher levels of income mean that customers are able and willing to
buy more goods and services. For example, the average person in the USA will
have a higher level of demand for goods and services than the average person
Definitions in Vietnam or Turkey.
Substitutes are goods or » Substitutes and complements — substitutes are goods or services that can
services that can be used be used instead of each other, such as Coca-Cola or Pepsi and tea or coffee. If
instead of each other, e.g. the price of one product falls, then it is likely the demand for its substitute will
tea or coffee.
Complements are products
also fall. Complements are products that are jointly demanded, such as tennis
that are jointly demanded, balls and tennis racquets or cinema movies and popcorn. If the price of one
e.g. tennis balls and tennis product increases, then the demand for its complement is likely to fall.
racquets. » Advertising — marketing messages are used to inform, remind and persuade
customers to buy a firm’s products. Companies such as McDonald’s, Apple and
Samsung spend hundreds of millions of dollars each year on their advertising
budgets in an attempt to increase the demand for their products.
» Government policies — rules and regulations such as the imposition of taxes
on tobacco and alcohol will affect the demand for certain products. Sales taxes
cause prices to increase, thereby reducing the level of demand. By contrast,
government subsidies for educational establishments and energy-efficient car
makers help to encourage more demand for education and environmentally
friendly cars due to the relatively lower prices.
» Economy — the state of the economy (for example, whether it is in an
economic boom or a recession) has a huge impact on the spending patterns
of the population. The global financial crisis of 2008, for example, caused the
demand for most goods and services around the world to decline as households
and businesses lacked confidence in the economy. By 2013, the financial crisis
had caused unemployment to exceed 26 per cent in both Greece and Spain —
the highest unemployment figures ever experienced in the European Union.
This undoubtedly reduced the level of demand for goods and services in these
countries.
There are other factors that can influence the level of demand for a particular
good or service. For example, the weather can affect the demand for ice
cream, beach resort holidays, winter jackets and umbrellas. The size and the
demographics of the population (such as age, gender, ethnicity and religious
beliefs) can also have an effect on the level of demand for goods and services.
For example, adults and children have different buying habits.

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7 deMand

Price and demand

Diagrammatically, the demand curve is shown as a downward-sloping curve to
indicate the inverse relationship between price and quantity demanded (see
Figure 7.1).

As the price falls from

P1
P1 to P2, the quantity
Price ($)

demanded rises from

P2 Q1 to Q2

Demand

O Q1 Q2
Quantity demanded

▲ Figure 7.1 The demand curve

Movements along a demand curve

Definitions A change in the price of a good or service causes a movement along the demand
curve. A price rise will cause a contraction in demand for the product — that is,
A contraction in demand
means a fall in the quantity the quantity demanded falls. By contrast, a reduction in price will cause an
demanded for a product extension in the quantity demanded, as shown in Figure 7.2.
following an increase in its
price.
An extension in demand
means an increase in the
quantity demanded for a A fall in price from P1 to P2
product following a fall in P3 Contraction causes demand to extend from
Price ($)

Q1 to Q2 whereas a price rise

its price. P1 Extension from P1 to P3 causes quantity
The market demand is demanded to contract from Q1 to Q3
the sum of all individual P2
demand for a particular
Demand
product.
O Q3 Q1 Q2
Quantity demanded

▲ Figure 7.2 Movements along the demand curve

Individual demand and market demand

The market demand refers to the aggregation of all individual demand for a
product. It is found by adding up all individual demand at each price level (see
Figure 7.3). For instance, suppose that a cinema charges $10 for its movie tickets
and the demand from male customers totals 500 per week while 400 females
purchase tickets at that price per week. The market demand for cinema tickets at
$10 per ticket is therefore 900 tickets per week.

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Conditions of demand

P($) P($) P($)

$10

Dm Dw Dm + w
O 500 Q O 400 Q O 900 Q
Male customers Female customers Total customers

▲ Figure 7.3 The market demand curve

Conditions of demand
While a movement in demand is caused by price changes only, a change in all
other (non-price) factors that affect demand, such as income, will cause a shift
in demand.
An increase in demand (rather than an increase in the quantity demanded)
is represented by a rightward shift in the demand curve from D1 to D3 in
Figure 7.4. For example, BMW recorded higher than expected profits in 2017 due
to increasing demand for its cars in Europe, the USA and Asia. Hence, the demand
for BMW’s cars was higher at all price levels. In Figure 7.4, when the demand
curve shifts from D1 to D3 at a price of P1 the quantity demanded increases from
Q1 to Q3.
By contrast, a decrease in demand (rather than a fall in the quantity
demanded) is shown by shifting the demand curve to the left, from D1 to D2 in
Figure 7.4, resulting in less quantity demanded at all price levels. At the price
of P1, demand falls from Q1 to Q2. For example, financial problems and rising
unemployment in the economy will decrease the demand for cars.

Study tip
Remember the difference
between changes in demand
and changes in the quantity A change in a non-price
Price ($)

demanded. factor that affects

P1 demand will shift the
• A shift in demand is demand curve
caused by changes in
non-price factors that D3
affect demand. D1

• A movement along a D2
demand curve is caused O Q2 Q1 Q3
by changes in the price of Quantity demanded
the product.
▲ Figure 7.4 Shifts in the demand curve

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