Welcome to the World of Demand!
Ever wondered why more people buy ice cream when it’s on sale, or why a sudden trend makes everyone rush to buy the same pair of trainers? In Economics, we call this Demand. It’s one of the most important concepts because it helps us understand how consumers (that’s you!) behave in a market.
By the end of these notes, you’ll be able to draw demand curves, explain why they move, and even calculate how sensitive shoppers are to price changes. Don’t worry if it seems a bit technical at first—we’ll break it down step-by-step!
1. What is Demand?
In everyday life, you might "demand" a snack from the fridge. But in Economics, demand is more specific. It isn't just wanting something; it’s Effective Demand.
Demand is the quantity of a good or service that consumers are willing and able to buy at a given price in a given time period.
• Willing: You actually want the product.
• Able: You have the money to pay for it.
Example: You might want a £2 million supercar (willing), but if you don't have the money (able), you don't have "demand" for it in economic terms.
The Law of Demand
There is an inverse relationship between price and quantity demanded. This is a fancy way of saying they move in opposite directions:
• When Price rises, the Quantity Demanded falls.
• When Price falls, the Quantity Demanded rises.
Quick Review: The Basics
• Individual Demand: The demand of just one person for a product.
• Market Demand: The total demand of all consumers in the market added together.
Key Takeaway: Demand requires both the desire for a product and the money to buy it. Generally, as things get cheaper, we buy more of them!
2. The Demand Curve
To visualize demand, we use a graph called the Demand Curve. It shows the relationship between price and quantity.
How to Draw It
1. Draw your axes: The vertical axis (Y) is always Price. The horizontal axis (X) is always Quantity.
2. Plot your points: Use data from a "demand schedule" (a simple table showing prices and quantities).
3. Connect the dots: You will get a line that slopes downwards from left to right.
Memory Aid: "Demand" goes "Down" (the curve slopes downwards!).
Movement vs. Shift: The Golden Rule
This is where students often get confused, but here is the trick:
• A Movement along the curve happens ONLY when the Price of the product changes.
• A Shift of the whole curve happens when anything else changes.
Movements (Price changes):
• Contraction: Price goes up, quantity demanded goes down (movement up the curve).
• Extension: Price goes down, quantity demanded goes up (movement down the curve).
Shifts (Other factors change):
• Rightward Shift: Demand increases (people want more even if the price stays the same).
• Leftward Shift: Demand decreases (people want less at the same price).
Key Takeaway: If price changes, move along the line. If a life-event or trend changes, move the whole line!
3. Why Does the Demand Curve Shift?
What makes people suddenly want more or less of something? We use the mnemonic PASIFIC to remember the causes of a shift:
• P - Population: More people in the country means more demand for food and houses.
• A - Advertising: A great ad campaign can increase demand for a brand.
• S - Substitutes: If the price of Pepsi goes up, the demand for Coca-Cola (the substitute) increases.
• I - Income: When people earn more money, demand for "normal goods" (like dining out) increases.
• F - Fashion and Tastes: If a style of shoe becomes trendy, demand shifts right.
• I - Interest Rates: If it’s cheaper to borrow money, demand for expensive items like cars increases.
• C - Complements: These are goods used together, like printers and ink. If printers get cheaper, demand for ink increases.
Common Mistake: Don't say "Price" causes a shift. Price only causes a movement along the curve!
4. Price Elasticity of Demand (PED)
Price Elasticity of Demand (PED) measures how much the quantity demanded changes when the price changes. It tells us how "responsive" or "sensitive" consumers are.
The Formula
\( PED = \frac{\% \text{ change in quantity demanded}}{\% \text{ change in price}} \)
Pro-tip: To find the % change, use: \( \frac{\text{New} - \text{Old}}{\text{Old}} \times 100 \)
Understanding the Results
• Price Inelastic (PED < 1): Consumers are NOT very sensitive to price changes. If the price goes up, they still buy it (e.g., petrol, medicine, addictive goods). The curve is steep.
• Price Elastic (PED > 1): Consumers ARE very sensitive. A small price rise makes them stop buying (e.g., a specific brand of chocolate). The curve is flat/shallow.
• Unitary Elasticity (PED = 1): The % change in price is exactly the same as the % change in quantity.
Analogy: Think of a rubber band. An Elastic demand "stretches" a lot when you pull the price. Inelastic demand is like a thick piece of string—it hardly moves at all!
Quick Review: What makes demand inelastic?
• Few substitutes (you have no other choice).
• It’s a necessity (you need it to survive).
• It's habit-forming (like cigarettes).
• It costs a tiny % of your income (like salt—if the price doubles, you still buy it).
5. Why is PED Important?
Business owners use PED to decide their prices to maximize Total Revenue (Price \( \times \) Quantity).
For Producers:
• If demand is Inelastic: They can increase the price to earn more revenue. People will keep buying because they have to!
• If demand is Elastic: They should decrease the price to earn more revenue. A small price drop will attract a huge number of new customers.
For Consumers:
• If your demand for something is inelastic (like electricity), you are vulnerable to price hikes because you can't easily switch or stop using it.
Key Takeaway: Knowing PED helps businesses set the "perfect" price. If your product is a necessity with no substitutes, you have "pricing power."
Final Summary Checklist
• Can you define demand as being "willing and able"?
• Do you remember that the demand curve slopes downwards?
• Can you distinguish between a movement (Price) and a shift (PASIFIC)?
• Do you know the PED formula and what the numbers mean?
• Can you explain why a petrol station might raise prices (inelastic) while a cafe might have a sale (elastic)?
You've got this! Economics is just the study of the choices we make every day. Keep practicing those diagrams!