Demand: IB Economics 2.1 study notes (HL & SL)

The law of demand

Demand is the quantity of a good that consumers are willing and able to purchase at each possible price over a period of time, holding other factors constant (ceteris paribus). The law of demand states that as the price of a good rises, the quantity demanded falls, and as price falls, quantity demanded rises.

This inverse relationship gives the demand curve its downward slope from top left to bottom right. Willingness alone is not demand: a consumer must also be able to pay, which is why demand is sometimes called effective demand.

Why the demand curve slopes downward

Two effects explain the inverse relationship. The substitution effect: when a good becomes more expensive relative to alternatives, consumers switch toward the now relatively cheaper substitutes, so quantity demanded falls. The income effect: a higher price reduces the real purchasing power of a fixed money income, so consumers can afford less of the good overall.

For a normal good both effects push in the same direction, reinforcing the downward slope. A supporting idea is the law of diminishing marginal utility: each extra unit consumed gives less added satisfaction, so consumers will only buy more at a lower price.

Individual versus market demand

An individual demand curve shows one consumer's planned purchases at each price. Market demand is the horizontal sum of all individual demand curves: at each price you add up the quantities every consumer wants to buy.

For example, if at a price of 4 dollars consumer A buys 3 units and consumer B buys 5 units, market demand at 4 dollars is 8 units. Repeating this at every price traces out the market demand curve, which lies further to the right than any single consumer's curve.

Movements along versus shifts of the curve

A movement along a demand curve is caused only by a change in the good's own price. A fall in price causes an extension (downward movement to a larger quantity demanded); a rise in price causes a contraction (upward movement to a smaller quantity demanded).

A shift of the whole demand curve is caused by a change in any non-price determinant. A rightward shift means more is demanded at every price (an increase in demand); a leftward shift means less is demanded at every price (a decrease in demand). Confusing these two is the single most common error in Paper 1 diagrams.

Non-price determinants of demand

The main non-price determinants are: income, the prices of related goods (substitutes and complements), tastes and preferences, the number of consumers, and expectations of future prices. A change in any of these shifts the whole curve.

For a normal good, higher income shifts demand right. A rise in the price of a substitute (for example bus fares rising) shifts demand for the alternative (train travel) right. A rise in the price of a complement (petrol) shifts demand for the paired good (large cars) left. Expected future price rises can shift current demand right as buyers bring purchases forward.

Real-world example

When many governments offered purchase subsidies and rebates for electric vehicles and preferences shifted toward lower-emission transport, the demand curve for EVs shifted right: more were demanded at every price. That is a shift, not a movement, because it was driven by non-price determinants (consumer subsidies and changing tastes), not by the EV price itself.

In contrast, changes that work through the EV's own price move along the demand curve rather than shift it. Falling battery and production costs lower the price of EVs by shifting the supply curve right, and a temporary retailer discount on one model cuts its price directly: both cause a movement down the demand curve to a larger quantity demanded, because only the good's own price changed.

Common Paper mistakes

Writing that a price change shifts the demand curve. A change in the good's own price is always a movement along the curve, never a shift.

Labelling axes incorrectly: price goes on the vertical axis, quantity on the horizontal axis, and both must be labelled with the good named. Unlabelled or reversed axes lose marks in Paper 1.

Saying demand rather than quantity demanded when describing the effect of a price change. Examiners reward the precise term.

How this is examined

• Demand diagrams appear on both Paper 1 (as part of extended-response answers) and Paper 2 (data response). Always draw a fully labelled diagram: axes, curve labels, and an arrow or new curve showing the change.
• Examiners award marks for the distinction between a movement along and a shift of the curve. State explicitly which one is happening and name the cause.
• When a question gives a non-price determinant, shift the curve and show the new equilibrium; when it gives a price change, move along the curve. Read the stimulus carefully to decide which.
• Use precise terms: quantity demanded for a movement, demand for a shift. Mark schemes penalise loose wording.

Key terms

demandlaw of demanddeterminants of demandsubstitution effectincome effectceteris paribus