2.3 - Notes Economics

Unit 2 – The Allocation of Resources
Chapter 2.3 – Demand
Demand
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 to distinguish genuine
demand from a want or a desire to buy something. The amount of a good or service demanded
at each price level is called the quantity demanded.
In general, the quantity demanded falls as price rises, whilst the quantity demanded rises at
lower prices. Therefore, there is an inverse relationship between the price of a good or service
and the demand. This rule is known as the law of demand. There are two reasons for this
relationship:
• As the price of a good or service falls, the customer's 'real' income rises (i.e., 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, more customers are able to pay, so they are more
likely to buy the product.
Demand schedule
A demand schedule is a tabular presentation of different prices of a commodity and its

corresponding quantity demanded per unit of time.
Demand curves
A demand curve can be drawn to show how many items of a product are wanted at given prices.
The price is shown on the vertical axis and the quantity is shown on the horizontal axis.
Diagrammatically, the demand curve is shown as a downward-sloping curve to show the
inverse relationship between price and quantity demanded.
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The market demand curve refers to the sum of all individual demand for a product. It is found
by adding up all individual demand at each price level.
Determinants of Demand
1. Price of the commodity – it is the most important determinant of any demand. Usually
when price of a commodity rises the demand for it decreases. When price falls demand
for that commodity increases; that means there is an indirect negative relationship
between price and quantity demanded.
2. Price of other commodities – price of related goods affect the demand. There are two
types of goods – substitute goods and complementary goods.
Substitute goods are those goods which can be placed in the use of another commodity.
For example, tea and coffee are substitutes. Suppose the price of tea goes on increasing
we may stop or reduce the consumption of tea and increase the use of coffee. That
means demand for coffee increases not because of the reduced price of coffee but
because of the increase in the price of tea.
Example of substitute goods are wheat and rice, coffee and tea, hamburger and hot dog
etc.
Complementary goods are those goods which are used together to satisfy a given want.
For example, jeep and diesel oil. Suppose the price of diesel goes on increasing there
may be decrease in the demand for jeep and vice versa. That means the demand for jeep
reduces not because of an increase in the price of jeep but because of an increase in the
price of diesel oil.
Example of complementary goods – petrol is a complement of motor vehicles; butter
and jam are complements to bread; milk and sugar are complements to tea and coffee
and so on.
2
3. Habits, fashion and tastes - Changes in habits, fashion and taste can affect the demand
for all types of goods and services. Products that become fashionable (such as
smartphones) enjoy an increase in demand, whereas those that become unfashionable
(such as last season's clothes) experience a fall in the level of demand.
4. Income - Higher levels of income mean that customers are able and willing to buy more
goods and services.
5. Advertising - Marketing messages are used to inform, remind and persuade customers
to buy a firm's products.
6. 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 encourage more demand
for education and environmentally friendly cars due to the relatively lower prices.
7. Economy - The state of the economy (whether it is in an economic boon or a recession)
also has a huge impact on the spending patterns of the population.
8. Weather – the weather can affect the demand for ice cream, beach resort holidays,
winter jackets and umbrellas.
9. Size of the population: The size and the demographics (such as age, gender, ethnicity
or religious beliefs) of the population can also have an effect on the level of demand for
goods and services. For example, males and females can have very different buying
habits.
Movements and shifts in demand curve
A change in price – A change in the price of a good or service causes a movement along the
demand curve. A price rise will cause a decrease (contraction) in the quantity demanded of the
product, whereas a reduction in price will cause an increase (expansion) in the quantity
demanded.
When the price of a product changes, there will be a movement along a demand curve. If there
is a rise in the price of a product, there will be a movement up the demand curve and a fall in
the quantity demanded. This is known as contraction in demand.
If there is a fall in the price of a product, there will be a movement down the demand curve and
a rise in the quantity demanded. This is known as extension in demand.
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An increase and decrease in demand
A movement along the demand curve is caused by price changes only. A change in all other
(non-price) factors that affect demand, such as income levels, will cause a shift in demand.
An increase in demand (rather than an increase in the quantity demanded) is represented by a

rightward shift of the demand curve from D1 to D3.
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, resulting in Jess quantity being demanded
at all price levels. For example, at a price of P1, demand was previously Q1, but has now fallen
to Q2.

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2.3 - Notes Economics

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Unit 2 – The Allocation of Resources

Chapter 2.3 – Demand

A demand schedule is a tabular presentation of different prices of a commodity and its

Movements and shifts in demand curve

An increase in demand (rather than an increase in the quantity demanded) is represented by a

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