1.2.2 Demand

• Demand is the amount of a good/service that a consumer is willing and able to purchase at a given price in a given time period
  • If a consumer is willing to purchase a good, but cannot afford to, it is not effective demand
    
    
• A demand curve is a graphical representation of the price and quantity demanded (QD) by consumers
  • If data were plotted, it would be an actual curve, however economists simplify curves in their sketches into straight lines so as to make analysis easier
    
    

Movements Along A Demand Curve

• If price is the only factor that changes (ceteris paribus), there will be a change in the QD
  • This change is shown by a movement along the demand curve

A demand curve showing a contraction in quantity demanded (QD) as prices increase and an extension in quantity demanded (QD) as prices decrease

Diagram Analysis

• An increase in price from £10 to £15 leads to a movement up the demand curve from point A to B
  • Due to the increase in price, the QD has fallen from 10 to 7 units
  • This movement is called a contraction in QD
• A decrease in price from £10 to £5 leads to a movement down the demand curve from point A to point C
  • Due to the decrease in price, the QD has increased from 10 to 15 units
  • This movement is called an extension in QD
• The law of demand captures this fundamental relationship between price and QD
  • It states that there is an inverse relationship between price and QD
    • When price rises the QD falls
    • When prices fall the QD rises
• This relationship partly explains why the demand curve is downward sloping

Shifts Of The Entire Demand Curve

• There are numerous factors that will change the demand for a good/service, irrespective of the price level. Collectively these factors are called the conditions of demand
  
  
• Changes to each of the conditions of demand, shifts the entire demand curve (as opposed to a movement along the demand curve)
  
  

A graph that shows how changes to any of the conditions of demand shifts the entire demand curve left or right, irrespective of the price level

• For example, if a firm increases their Instagram advertising, there will be an increase in demand as more consumers become aware of the product
  • This is a shift in demand from D to D₁. The price remains unchanged at £7 but the demand has increased from 15 to 25 units
    
    

An Explanation of How Each of the Conditions of Demand Shifts the Entire Demand
Curve at Every Price Level

• Marginal utility is the additional utility (satisfaction) gained from the consumption of an additional product
  
  
• The utility gained from consuming the first unit is usually higher than the utility gained from consuming the next unit
  • For example, a hungry consumer gains high utility from eating their first hamburger. They are still hungry and purchase a second hamburger but gain less satisfaction from eating it than they did from the first hamburger
    
    
• To calculate total utility, the marginal utility of each unit consumed is added together
  • This means that total utility keeps increasing even while marginal utility is decreasing
    
    
• The Law of Diminishing Marginal Utility states that as additional products are consumed, the utility gained from the next unit is lower than the utility gained from the previous unit
  
  
• The Law of Diminishing Marginal Utility helps to explain the reason why the demand curve is downward sloping
  • When the first unit is purchased, the utility is high and consumers are willing to pay a high price
  • When subsequent units are purchased, each one offers less utility and the willingness of the consumer to pay the initial price decreases
  • Lowering the price makes it a more attractive proposition for the consumer to keep consuming additional units
  • This is one reason why firms offer discounts such as '50% off the second item'