Welcome to the World of Demand!
Hi there! Welcome to your study notes on Demand. This is one of the most exciting parts of Economics because it helps us understand why we buy the things we do. Whether you are wondering why everyone suddenly wants a specific pair of sneakers or why you buy less chocolate when the price goes up, you are actually thinking about Economics!
In this chapter, we will look at how consumers (like you and me) behave in a market. Don't worry if some of the graphs look a bit scary at first—we will break them down step-by-step until they make perfect sense.
1. What is Demand?
In everyday life, we might say we "demand" a pizza, but in Economics, demand means something very specific. To have effective demand, a consumer must be:
1. Willing to buy the product.
2. Able to pay for it (they have the money!).
Example: You might really want a luxury Ferrari (willing), but if you don't have the £200,000 to buy it (able), an Economist would say you have no "effective demand" for it.
The Law of Demand
The Law of Demand states that there is an inverse relationship between price and quantity demanded. This is just a fancy way of saying:
- When the Price (\(P\)) goes UP, the Quantity Demanded (\(QD\)) goes DOWN.
- When the Price (\(P\)) goes DOWN, the Quantity Demanded (\(QD\)) goes UP.
Quick Review Box:
Think: Price and Quantity move in opposite directions. If things are cheaper, we usually buy more!
Key Takeaway: Demand is the quantity of a good or service that consumers are willing and able to buy at various prices. The Law of Demand tells us that people generally buy less as prices rise.
2. Individual and Market Demand
Markets are made up of many different people. Economics looks at demand in two ways:
Individual Demand: This is the demand of just one person for a product.
Example: How many coffees you buy per week at different prices.
Market Demand: This is the sum of all individual demands in the market. To find the market demand, we simply add up what everyone is willing to buy at a specific price.
Example: If there are only three students in a school, and Student A wants 1 coffee, Student B wants 2, and Student C wants 0 at the price of £3, the Market Demand at £3 is \(1 + 2 + 0 = 3\) coffees.
Key Takeaway: Market demand is just the total of everyone's individual demand added together.
3. Different Types of Demand
Not all demand works the same way. Sometimes, the demand for one thing depends on something else!
Joint Demand (Complementary Goods)
This happens when two goods are bought together. If you buy one, you almost always need the other.
Example: Printers and Ink Cartridges, or Consoles and Video Games.
Memory Aid: They are "Best Friends" — they go everywhere together!
Competitive Demand (Substitute Goods)
This happens when goods are in competition with each other. If the price of one goes up, you'll just buy the other instead.
Example: Coke vs. Pepsi, or Apple vs. Samsung.
Memory Aid: They are "Rivals" — you choose one OR the other.
Composite Demand
This happens when a good is used for more than one purpose. An increase in demand for one use leaves less for the other.
Example: Milk. It can be used to make cheese, butter, or just for drinking. If everyone starts demanding more cheese, there might be less milk available for drinking!
Key Takeaway: Understand the relationship between products! Are they friends (Joint), rivals (Competitive), or multi-talented (Composite)?
4. Movements Along the Demand Curve
When we draw a demand curve, Price is always on the vertical (\(y\)) axis and Quantity is on the horizontal (\(x\)) axis. The demand curve always slopes downwards from left to right.
Memory Tip: Demand curve goes Downwards!
A movement along the curve only happens when the Price of that specific product changes. There are two types:
1. Contraction: When the price rises, the quantity demanded falls. (We move up the curve).
2. Extension: When the price falls, the quantity demanded rises. (We move down the curve).
Common Mistake to Avoid: Students often say "demand has changed" when they mean "quantity demanded." If the price changes, only the quantity demanded changes, not the whole demand curve!
5. Shifts of the Demand Curve
Sometimes, people decide to buy more or less of a product even if the price stays the same. When this happens, the entire curve moves left or right. This is called a Shift.
- Shift to the Right (Increase): People want more at every price.
- Shift to the Left (Decrease): People want less at every price.
What causes a Shift? (The PIRATES Mnemonic)
Use the word PIRATES to remember the factors that shift demand:
P - Population: More people means more demand.
I - Income: If people earn more, they buy more "normal goods."
R - Related Goods: Changes in the price of substitutes or complements.
A - Advertising: A good ad campaign makes people want the product more.
T - Tastes and Fashion: If something becomes trendy, demand shifts right.
E - Expectations: If people think the price will rise tomorrow, they buy it today!
S - Seasons/Special occasions: Demand for sun cream shifts right in the summer.
Did you know?
When your income goes up, you might actually buy less of some things, like "supermarket own-brand" bread. These are called inferior goods!
Step-by-Step: How to draw a Shift
1. Draw your original axes and the first demand curve (\(D1\)).
2. If demand increases (e.g., due to a good ad), draw a new curve to the right of the first one (\(D2\)).
3. Draw an arrow pointing right to show the direction of the shift.
Key Takeaway: Price changes = Movement along the curve. Anything else (PIRATES) = Shift of the whole curve.
Quick Final Summary
1. Demand is being willing and able to buy.
2. The Curve slopes down because as price drops, we buy more.
3. Movements are caused by Price changes only.
4. Shifts are caused by external factors (PIRATES).
5. Related goods can be Complements (Joint) or Substitutes (Competitive).
Don't worry if this seems tricky at first! The best way to master Demand is to practice drawing the curves and thinking about why you personally buy certain things. You're an economic agent every time you go to the shops!