š What Is Demand?
Definition: Demand is the quantity of a good or service that consumers are willing and able to buy at each possible price, over a given time period.
It is not just wanting something
In economics, demand is not just about desire. You might really want a sports car, but unless you can actually afford it, that is not demand. Economists call this effective demand.
- Willingness to buy ā you actually want the product
- Ability to buy ā you have the money to pay for it
- At a specific price ā demand always relates to a price level
- Over a time period ā per day, per week, per year
Individual vs market demand
Individual demand is how much one person wants to buy at each price. Market demand is the total from ALL buyers in the market added together. If 1,000 people each want 2 coffees at $3, market demand at $3 is 2,000 coffees.
In exams, you will almost always deal with market demand ā the combined demand from all consumers in a market. When a question says 'demand', it means market demand unless stated otherwise.
š The Demand Curve
What it shows: A demand curve is a graph that shows how much of a good consumers want to buy at every possible price. It slopes downward from left to right.
How to draw a demand curve
[Diagram: demand-curve] - Available in full study mode
- Price (P) goes on the vertical (Y) axis
- Quantity demanded (Q) goes on the horizontal (X) axis
- The curve slopes DOWNWARD from left to right
- Label the curve 'D' (or 'Dā' if you will show a shift later)
- Always add a title like 'Market for wheat'
Label EVERYTHING on your diagrams ā axes, curves, equilibrium points. Unlabelled diagrams lose marks in the exam. āļø
Reading the curve
At a high price, the quantity demanded is low (top-left of the curve). At a low price, the quantity demanded is high (bottom-right). This is the inverse relationship between price and quantity demanded.
Think of it this way: when your favourite snack goes on sale, you buy more. When the price doubles, you buy less (or switch to something else). That is the demand curve in action.
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š¤ Why Does Demand Slope Downward?
Two key effects explain why people buy more when prices fall.
The income effect
When the price of a good falls, your money stretches further ā you feel richer even though your actual income has not changed. With this extra purchasing power, you can afford to buy more.
- Price falls ā your money buys more ā you purchase more of the good
- Price rises ā your money buys less ā you purchase less
The substitution effect
When the price of a good falls, it becomes relatively cheaper compared to similar products. Consumers switch towards it and away from the now-relatively-more-expensive alternatives.
- Price falls ā good is now cheaper than substitutes ā consumers switch to it
- Price rises ā good is now more expensive ā consumers switch to alternatives
The Law of Demand: As the price of a good falls, the quantity demanded rises ā and as the price rises, the quantity demanded falls ā ceteris paribus.
Both effects work together: lower price ā more purchasing power (income effect) + relatively cheaper (substitution effect) ā more quantity demanded. š