IBEconomicsHLRevision Notes2. Microeconomics2.1 Demand2.1.1 Demand, Price & Quantity

Demand, Price & Quantity (HL IB Economics)

Revision Note

Steve Vorster

Expertise

Economics & Business Subject Lead

Introduction to 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.  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
     

    2-3-1-demand-price-and-quantity-1

Market demand for children's swimwear in July is the combination of boys and girls demand

 

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

Assumptions Underlying the Law of Demand

  • The law of demand is based on three key assumptions:

    • The income effect

    • The substitution effect

    • The law of diminishing marginal utility

  • These three assumptions collectively contribute to the understanding of the law of demand and how consumers' behaviour is influenced by changes in price

    • The income effect and substitution effect highlight how changes in price affect consumers' purchasing power and their choices among different goods

    • The law of diminishing marginal utility explains why consumers are less willing to pay higher prices for additional units of a good

An Explanation of the Three Assumptions


The Assumption


 Explanation

The Income Effect

  • The income effect refers to the change in a consumer's purchasing power resulting from a change in the price of a good/service

    • When the price of a good decreases, consumers' purchasing power increases as with the same income they can buy more of the good

    • When the price of a good increases, consumers' purchasing power decreases as with the same income they can afford to purchase less of the good
       

  • The income effect assumes that consumers will adjust their consumption patterns based on changes in their purchasing power caused by price fluctuations

The Substitution Effect

  • The substitution effect suggests that consumers will substitute goods/services that have become relatively more expensive with those that have become relatively less expensive

    • When the price of a particular good rises, consumers may seek alternatives that provide similar utility or satisfaction at a lower cost

    • E.g. if the price of brand A coffee increases, consumers may switch to brand B coffee, assuming it provides a similar level of satisfaction but at a lower price
       

  • The substitution effect assumes that consumers are rational decision-makers who have perfect information and respond to changes in relative prices by adjusting their consumption 

The Law of Diminishing Marginal Utility

  • 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

  • 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
       

  • Lowering the price makes it a more attractive proposition for the consumer to keep consuming additional units - and there is a movement down the demand curve

Movements Along a Demand Curve

  • 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

L44o4OxC_1-2-2-movement-along-demand-curve_edexcel-al-economics

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

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    Steve Vorster

    Author: Steve Vorster

    Steve has taught A Level, GCSE, IGCSE Business and Economics - as well as IBDP Economics and Business Management. He is an IBDP Examiner and IGCSE textbook author. His students regularly achieve 90-100% in their final exams. Steve has been the Assistant Head of Sixth Form for a school in Devon, and Head of Economics at the world's largest International school in Singapore. He loves to create resources which speed up student learning and are easily accessible by all.