Demand

Do Now
1. What are the 3 Types of Economic Systems we have
learnt?
2. What is the Invisible Hand?
3. What are the 3 Functions of the Price Mechanism
4. The UK is an example of a Mixed Economy. State 2
advantages + 2 disadvantages of a Mixed Economy?
 Demand
1. What are the 3 Types of Economic Systems we have
learnt?
• Free Market Economy, Command Economy and
Mixed Economy.
2. What is the Invisible Hand?
• This is a metaphor used by Adam Smith to
describe how individuals making self-interested
decisions. This decision is optimal in the Free
Market Economy as that is demanded by
consumers will eventually be produced by firms.
 Demand
3. What are the 3 Functions of the Price Mechanism
• Signalling, Incentive, Rationing.
 Demand
4. The UK is an example of a Mixed Economy. State 2
advantages + 2 disadvantages of a Mixed Economy?

+ Allows for freedom

+ Anyone can be successful innovation

- Government Disputes
- Taxes is used to pay the elderly to look after them
in dire situations
Demand

What is demand?
Come up with your best definition
 Definitions
• Market – this is where buyers and sellers can exchange
goods and services
• The price charged and the quantity sold of each good or
service is dependent on the levels of supply and
demand in the market.

• Demand – this is the quantity that consumers are willing

and able to buy at a given price in a given period of time.
 Law of Demand
Law of Demand: There is an inverse relationship between
price and quantity demanded. This means that, as the price
increases, quantity demanded decreases. Whereas, if price
decreases, quantity demanded increases.

However, we need to make a fundamental assumption first:

• We assume Ceteris Paribus when the price changes
• “We assume all other factors remain equal”
• This allows us to isolate ONLY price changes in the market
so we can see the impact it has on quantity demanded.
Demand
Plot the following data onto a diagram. Price on the
Y axis, Quantity on the X axis
Price
0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 5.00
(£)

Quantity
demanded 800 750 700 650 600 550 500 450 400 350
(000s)

1. Plot the graph

2. Describe the shape of the demand curve
3. Summarise the relationship between price and
quantity demanded
Demand curve

Price
P1
The basic law of demand is that
demand varies inversely with price
– lower prices make products more
affordable for consumers. The P2

demand curve is downward sloping.

Any change in price of a product Q1 Q2 Quantity
will cause a movement along the
curve.
E.g a fall in price from P1 to P2 results in an increase in
quantity demanded from Q1 to Q2
Demand curve 2 reasons for this inverse
relationship…
The income effect
A fall in price increases the real purchasing power of
consumers allowing people to buy more with a given budget
For normal goods, demand rises with an increase in real
income
The substitution effect
A fall in the price of good X makes it relatively cheaper
compared to substitutes causing some consumers to switch
to good X leading to higher demand
Much depends on whether products are close substitutes
 Movement along Demand Curve
• The demand curve plots the relationship between the
price being paid by the consumer… against the quantity
demanded for a good or service.

• Movements along the demand curve are caused when the

firm selling the good changes its price.
• When the demand increases along the curve, this is known as an
extension in demand.
• When the demand decreases along the curve, this is known as a
contraction in demand.
 Movements along Demand curve
Price (£) In microeconomics, price always
goes on the y axis and quantity
on the x axis. Extension in demand: whenever the price
is decreased (P1-P2) by the seller, this will bring
(90) P3 Contraction in demand about an extension in demand (Q1-Q2)

• Qd (Quantity demanded) has gone from 350

(75) P1 units to 600 units and so there is
Extension in demand
an extension in demand of 250 units.

Contraction in demand: whenever the price

(50) P2 is increased (P1-P3) by the seller, this will bring
about a contraction in demand (Q1-Q3)
• Qd (Quantity demanded has gone from 350
units to 200 units and so there is
a contraction in demand of 150 units.

TOP TIP: You must not confuse these terms

D1 with ‘increase’ or ‘decrease’ in demand…
Q3 Q1 Q2 as these imply a shift. If there is a movement
Quantity (units)
along, always say contraction/extension.
(200) (350) (600)
 Progress Check
Ceteris paribus

TASK:
1. Q) What is it called when
you move from P1 to P2?
P1 to P2

2. Q) What is it called when P1 to P2

P1 to P3

you move from P1 to P3? P1 to P3

Ceteris paribus means “all other things being equal”. Here we are
assuming that only the price is changing. We assume the factors that
cause a shift in the demand curve have not changed.
 Reasons why downward sloping
TASK:
In your pairs, write down at least 3 examples of substitutes!
Some Examples:
• Coke vs. Pepsi
• Premium vs. regular gasoline
• Butter and margarine
• Tea and coffee
• Apples and oranges
• Riding a bike versus driving a car
• E-books and regular books
 The Concept of Utility
• Utility is a measure of the satisfaction that we get from
purchasing and consuming a good or service

• Total utility:
– The total satisfaction from a given level of Utility is a measure
consumption of satisfaction

• Marginal utility
– The change in satisfaction from consuming an extra
unit

• Standard economic theory believes in the idea of Does the utility we

get affect our
diminishing returns i.e. the marginal utility of extra willingness to pay?
units declines as more is consumed
Reasons why downward sloping
Satisfaction derived
from consuming a good
Becoming less… or service.

3) Diminishing Marginal Utility

This means ‘one more’
throughout Economics
Law of Diminishing Marginal Utility
• As you continue to consume a given product, you will eventually get less
additional utility (satisfaction) from each unit you consume.
• The price that a consumer is willing to pay, derives from the utility that
they gain from consuming the good.
• Combining this idea with the diminishing marginal utility concept, explains
the shape of the demand curve:

1st quantity of chocolate 2nd quantity of 3rd quantity of chocolate 4th quantity of chocolate
will bring about the most chocolate will bring further utility, some utility is gained, but by
utility. will bring high utility, but less than 1st and 2nd this point the consumer would
but feel rather sick!
not as much as the 1st.
 Shift in Demand - FACTORS
• Changes in factors other than the price of the product itself
can bring about a shift in the level of demand at each
price…
• For Example, a shift would mean that at the same price of
£60, demand has increased from 500 to 700 units.
 Shifts in demand
Price Price Quantity Demanded (D1) Quantity Demanded (D2)

100 100

90 200

80 300

70 400

60 500

60 50 600

40 700

30 800

20 900

10 1000

TOP TIP: Look how the shift in the curve

D2 should be drawn parallel… when there
D1 is a change in the conditions of demand,
the demand changes at every price level.
500 700 Quantity
 Factors causing a Shift in Demand
TASK:
Q) In your pairs, discuss
reasons which may cause the
demand curve to shift? (Non-
price factors)

• Demand – this is the quantity that consumers are

willing and able to buy at a given price in a given
period of time.
 Factors causing a Shift in
Demand
P – Population
A – Advertising
S – Substitute Price
I – Incomes
F – Fashion / Taste
I – Interest Rates
C – Complements Price
 Factors affecting Demand
P – Population,
• A greater population will increase demand from D1 to
D2
• This is because there will obviously be more people
willing and able to buy goods and services.
A - Advertising
• Good advertisements, affects our willingness to buy
something. Moreover, if there's bad advertisement,
the demand curve will shift left from D1-D3.
 Factors affecting Demand
S – Substitutes price
• A substitute good, is a good that is in competition
with something else.
• E.g., Coke and Pepsi are in competition with
each other.
• If the price of Pepsi goes up, more people will be
willing and able to buy Coke as this is cheaper.
This will therefore lead to an increase in demand
for Coke. This is shown through a shift to the
right in the demand curve.
 Factors affecting Demand
I – Incomes
• Need to make a distinction between “Normal goods” and
“Inferior goods”
• Normal goods – this is a good for which demand
increases as income rises. E.g. luxury cars, fine-dining,
• (When our income increases, demand for them will
increases thus the curve shifts to the right)
• (When our income decreases, demand for luxury cars
decreases, thus the demand curve shifts to the left from
D1 to D3.)
 Factors affecting Demand
I – Incomes
• Inferior goods - This is a good for which demand
decreases as income rises OR for which demand
increases as income falls.
• Examples of inferior goods include: ‘Tesco Value’
products, taking the Bus instead of Uber etc.
• This is because when you have less income, you are
more likely to purchase supermarket brand products
as they cheaper, yet they get the job done. When
your income rises, you may opt for more branded
 Factors affecting Demand
• F – Fashion/ Taste
• If fashion changes towards a good or service, it is going to make us
demand more of said goods or service.
• I – Interest Rate
• This will definitely affect demand if consumers need to borrow in order to
buy, e.g.,, housing, holidays, jewellery,
• If Interest rates go up, it makes it more expensive to borrow, reducing the
demand for these goods are services, shifting the demand curve from D1
to D3.
 Factors affecting Demand
• C - Complements Price
• A complement is when a good is often bought together with another
good. (this is the opposite of a Substitute good)
• Here, there is an inverse relationship between the Price of Good A
and the demand of Group B.
• E.g. Printer inks is a complement to printers. You buy printers first,
then the ink.

• Lets think about the Market for printers.

• If the price of Printers go up, this will shift the Demand of Printer Ink to the
left.
• The Price of Printer Ink has not changed, however its demand its dependent
on the price on Printers.
 Reasons why downward sloping
TASK:
In your pairs, write down at least 3 examples of Complements!
• For example:
• When you purchase a printer, you tend you also buy
printer ink too (complements)
Demand for? Change in the market (i) For a movement – extension or (i) For a shift in demand –
contraction? increase or decrease?
London Underground tickets A rise in petrol prices
Increase
Cinema tickets All fall in the average level of real incomes for
UK households Decrease
New cars A rise in the average price of second-hand cars
Housing UK population increases by 0.6% each year.
Increase
Rented housing Banks increase minimum cash deposit Increase
required for a mortgage from 10% to 25%.
Increase
Cars World oil prices fall by 80%
Cigarettes UK Government increase the tax on tobacco. Increase
Ice cream UK experiences biggest heatwave in 50 years. Contraction
PlayStation controller Xbox consoles are recalled by Microsoft due
to safety concerns.
Increase
Solar panels UK Government introduces a 30% subsidy Increase
Cadbury’s Dairy Milk Salmonella outbreak at the factory.
Extension
Eating in restaurants Wages rise by 2% and inflation is 5%
Decrease
Decrease
 Progress Check

1. When do we speak of an “expansion” or a “contraction” in the

quantity demanded?

2. When do we speak of an “increase” or “decrease” in demand?

3. What happens to the demand for a product when the price

decreases?
 Progress Check

1. When do we speak of an “expansion” or a “contraction” in the

quantity demanded?
• When there is a up or down a curve due to a change in price
2. When do we speak of an “increase” or “decrease” in demand?
• When the curve shifts outwards or inwards due to any of the factors in the
Acronym PASIFIC
3. What happens to the demand for a product when the price
decreases?
• Nothing. Demand stays the same, but the quantity demanded increases.
 Derived Demand
Some markets are Interrelated, which
means that changes in one market affect
a related market.

Derived demand – this is the demand for

a factor of production used to produce
another good or service

TASK:
1. In your pairs write down at least 3
examples of Derived Demand
 Composite Demand
Some markets are Interrelated, which
means that changes in one market affect a
related market.

• Composite Demand – this is when some

goods have more than one uses.
• E.g. Oil can be used to make plastics
or for fuel. This means that changes
in the demand for Fuel could lead to
changes in the supply of plastics.

TASK:
1. In your pairs write down at least 3
examples of Composite Demand
 Paradox of Value
• Why are items such as diamonds, which
are not essential to human existence,
priced higher than an item which is
essential to human existence, such as
water…?

• This is known as the paradox of value.

TASK:
1. Can you use the law of diminishing
marginal utility to explain why diamonds
are priced higher than water?
 Paradox of Value
• If goods are plentiful, then consumers are only prepared to pay a
low price because goods in higher quantities have lower marginal
utility.
• Therefore, the more we consume an item… the lower the
marginal utility and the lower the price that we are willing to pay!

• Whereas goods which are scarce and only able to be consumed in

lower quantities, will have higher marginal utility and therefore a
higher price that consumers are willing pay.
 Veblen Goods
Demand for Goods may not always be
Downward Sloping:
• These goods are rare and have an upward
sloping demand curve.
• As the price rises, the quantity demanded
rises.
• This would be prestigious goods that are
subject to the ‘snob effect’.
• The higher the price, the more people
want to be seen to be consuming them.
• Diamonds, supercars, exclusive property,
ROLEX