What demand means

· Demand = the relationship between the price of a good/service and the quantity demanded over a period of time, ceteris paribus.
· The law of demand: as price rises, quantity demanded falls; as price falls, quantity demanded rises, ceteris paribus.
· Demand refers to the whole curve; quantity demanded refers to one point on the curve.
· In diagrams, price is on the vertical axis and quantity is on the horizontal axis.
· The demand curve is downward sloping.

Why the demand curve slopes downward

· Income effect: when price falls, consumers can buy more with the same income, so quantity demanded rises.
· Substitution effect: when price falls, the good becomes relatively cheaper than substitutes, so consumers switch toward it.
· Law of diminishing marginal utility: as more units are consumed, marginal utility falls, so consumers are only willing to buy extra units at a lower price.
· These ideas explain why the demand curve slopes downward.
· In exam answers, link the slope to income effect, substitution effect and diminishing marginal utility.

This diagram illustrates the law of diminishing marginal utility: as consumption rises, marginal utility falls. This supports the idea that consumers will only buy additional units if the price is lower. Source

This diagram separates the substitution effect from the income effect when price changes. For IB Economics, it helps explain why a fall in price usually increases quantity demanded. Source

Individual demand and market demand

· Individual demand = the demand of one consumer for a good/service at different prices.
· Market demand = the sum of all individual consumers’ demand for that good/service at each price.
· To derive market demand, add together the quantities demanded by all consumers at each price.
· A market demand curve is also generally downward sloping.
· In explanations, use the phrase horizontal summation of individual demand curves if relevant.

Non-price determinants of demand

· A non-price determinant changes demand itself, so the whole demand curve shifts.
· Income: for most normal goods, higher income increases demand; lower income decreases demand.
· Tastes and preferences: favourable changes increase demand; unfavourable changes decrease demand.
· Future price expectations: if consumers expect higher future prices, current demand rises; if they expect lower future prices, current demand falls.
· Price of related goods:
· Substitutes: if the price of one good rises, demand for its substitute rises.
· Complements: if the price of one good rises, demand for its complement falls.
· Number of consumers: more consumers in the market increase demand; fewer consumers decrease demand.
· In diagram questions, increased demand = rightward shift; decreased demand = leftward shift.

Movements along the demand curve vs shifts of the demand curve

· A movement along the demand curve is caused only by a change in the good’s own price.
· A fall in price causes an extension in demand; a rise in price causes a contraction in demand.
· A shift of the demand curve is caused by a change in a non-price determinant of demand.
· A rightward shift means more is demanded at every price.
· A leftward shift means less is demanded at every price.
· Common exam error: saying a change in price shifts demand. It does not; it causes a movement along the curve.
· Use precise language: change in quantity demanded = movement along curve; change in demand = shift of curve.

This diagram shows a rightward shift of the demand curve, meaning demand has increased at every price. It is ideal for revising the difference between a shift in demand and a movement along a single demand curve. Source