Demand Curves (AQA A Level Economics)

• 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
  • Effective demand is demand supported by the necessary purchasing power (the ability to pay)
  • 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 the data were plotted, it would be an actual curve.  Economists, however, use straight lines so as to make analysis easier
• The law of demand states that there is an inverse relationship between price and quantity demanded (QD), ceteris paribus
  • When the price rises, the QD falls
  • When the price falls, the QD rises

Individual and Market Demand

• Market demand is the combination of all the individual demand for a good/service
  • It is calculated by adding up the individual demand at each price level
      

The Monthly Market Demand for Newspapers in a Small Village

Customer 1	Customer 2	Customer 3	Customer 4	Market Demand
30	15	4	4	53

  

• Individual and market demand can also be represented graphically

Diagram: Market Demand for Children's Swimwear

 

Boys, girls and total customer demand curves for children's swimwear in July  

Diagram analysis

• A shop sells both boys and girls swimwear
• In July, at a price of $10, the demand for boys swimwear is 500 units and girls is 400 units
• At a price of $10, the shops market demand during July is 900 units

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

Diagram: Movement Along a Demand Curve 

A demand curve shows 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

• 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 and include
  • Changes in real income
  • Changes in tastes/preferences
  • Changes in the price of related goods (substitutes and complements)
  • Changes in the number of consumers
  • Future price expectations
• Changes to each of the conditions of demand, shift the entire demand curve (as opposed to a movement along the demand curve)

Diagram: Shift of the Demand Curve

Changes to any of the conditions of demand shift 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
    
    

How Changes to the Conditions of Demand Shift the Entire Demand Curve at Every Price Level

Condition of Demand	Explanation	Impact	Shift	Impact	Shift
Changes in real income	Real Income determines how many goods and services can be purchased by consumers There is a direct relationship between income and demand for goods/services  Normal goods have a positive relationship with income, as income rises, demand rises, and vice versa Inferior goods have an inverse relationship with income, as income rises, demand falls, and vice versa	Income Increases	D Increases Shifts Right (D→D1)	Income Decreases	D Decreases Shifts Left (D→D2)
Changes in taste/preferences	If goods/services become more desirable, then demand for them increases There is a direct relationship between changes in taste/preferences and demand Advertising or branding can change tastes/preferences	Good becomes more preferable	D Increases Shifts Right (D→D1)	Good becomes less preferable	D Decreases Shifts Left (D→D2)
Changes in the prices of substitute goods (Related goods)	Changes in the price of substitute goods will influence the demand for a product/service There is a direct relationship between the price of good A and demand for good B E.g. The price of a Sony 60" TV (good A) increases so the demand for LG 60" TV (good B) increases	Price of Good A Increases	D for Good B Increases Shifts Right (D→D1)	Price of Good A Decreases	D for Good B Decreases Shifts Left (D→D2)
Changes in the prices of complementary goods (Related goods)	Changes in the price of complementary goods will influence the demand for a product/service There is an inverse relationship between the price of good A and demand for good B For example, the price of printer ink (good A) increases so the demand for ink printers (good B) decreases	Price of Good A Increases	D for Good B Decreases Shifts Left (D→D2)	Price of Good A Decreases	D for Good B Increases Shifts Right (D→D1)
Changes in the number of consumers	If the population size of a country changes over time, then the demand for goods/services will also change There is a direct relationship between the changes in population size and demand Demand will also change if there is a change to the age distribution in a country, as different ages demand different goods and services, e.g an ageing population will buy more hearing aids	Population Increases	D Increases Shifts Right (D→D1)	Population Decreases	D Decreases Shifts Left (D→D2)
Future price expectations	If consumers expects the price of a good/service to increase in the future, they will purchase it now, and demand will increase If consumers expects the price of a good/service to decrease in the future, they will wait to purchase it later, and demand will decrease	Expectations price will rise	D Increases Shifts Right (D→D1)	Expectations price will fall	D Decreases Shifts Left (D→D2)