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2.1

Demand

Unit 2 · Microeconomics · SL and HL

Demand is the first half of the most-used model in economics. The key skill on this page is telling the difference between a movement along a demand curve, caused only by the good’s own price, and a shift of the whole curve, caused by everything else. Almost every market question in Papers 1, 2 and 3 depends on getting that right, and on drawing it with correctly labelled axes.

🎯What you need to be able to do

  • Define demand and explain the law of demand, drawing a downward-sloping demand curve.
  • Explain the relationship between individual consumers’ demand and market demand.
  • Explain the non-price determinants of demand: income, tastes and preferences, future price expectations, the price of related goods (substitutes and complements), and the number of consumers.
  • Distinguish between movements along the demand curve and shifts of the demand curve, with diagrams.
  • HL Explain the assumptions underlying the law of demand: the income and substitution effects and the law of diminishing marginal utility.

📚The economics

Demand and the law of demand

Demand is the quantity of a good or service that consumers are willing and able to buy at each possible price, in a given time period, ceteris paribus. “Able” matters: wanting a new car is not demand unless you can pay for it (effective demand).

The law of demand states that there is a negative (inverse) relationship between the price of a good and the quantity demanded, ceteris paribus: as price rises, quantity demanded falls; as price falls, quantity demanded rises. Drawn with price on the vertical axis and quantity on the horizontal, the demand curve slopes downwards.

A downward-sloping demand curve D. A fall in price from P1 to P2 moves consumers from point A to point B along the same curve, raising quantity demanded from Q1 to Q2.
A change in the good’s own price causes a movement along the demand curve.

Why the demand curve slopes downwards HL

  • The substitution effect. When the price of a good falls, it becomes cheaper relative to other goods, so consumers switch towards it and away from substitutes.
  • The income effect. When the price of a good falls, consumers’ real income (purchasing power) rises: the same money buys more. For a normal good, higher real income means buying more of it.
  • The law of diminishing marginal utility. Utility is the satisfaction from consuming a good; marginal utility (MU) is the extra satisfaction from one more unit. As consumption of a good increases, the marginal utility of each additional unit falls. Because each extra unit is worth less to the consumer, they will only buy more if the price falls. A demand curve is really a marginal benefit curve.
A bar chart of marginal utility from glasses of iced tea: 30, 22, 15, 9, 4 and 0 utils for the first to sixth glass. Total utility is 30, 52, 67, 76, 80 and 80.
Each extra glass adds less satisfaction. Total utility still rises until marginal utility reaches zero.

Individual and market demand

An individual consumer’s demand shows how much one person buys at each price. Market demand is the sum of all individual demands: at each price, add the quantities every consumer demands. On a diagram this is a horizontal summation of the individual demand curves (see the worked example below).

Non-price determinants of demand

A change in any of these shifts the whole demand curve: at every price, more (shift right, an increase in demand) or less (shift left, a decrease) is demanded.

  • Income. For a normal good, higher income increases demand (restaurant meals, flights). For an inferior good, higher income decreases demand, as consumers switch to better alternatives (instant noodles, second-hand clothes, bus travel for some households). See YED in 2.5.
  • Tastes and preferences. Advertising, fashion, health information and social media change what people want. A health scare about sugar lowers demand for soft drinks; a viral trend raises demand for a snack.
  • Future price expectations. If consumers expect prices to rise, they buy now, so demand increases today. Expected price falls lead consumers to wait, so demand falls today.
  • Price of related goods. Substitutes are goods used in place of each other (Grab and Gojek rides, tea and coffee): if the price of one rises, demand for the other increases. Complements are goods used together (motorcycles and petrol, printers and ink): if the price of one rises, demand for the other decreases.
  • Number of consumers. Population growth, tourism or new export markets add buyers. When international arrivals to Bali recovered after 2022, demand for villa rentals and scooter hire rose.

Movements along and shifts of the demand curve

Left: a single demand curve, with a price fall from P1 to P2 causing a movement along it from Q1 to Q2. Right: demand curve D1 shifting right to D2 (an increase), so that at the same price P quantity rises from Q1 to Q2, and left to D3 (a decrease).
Price changes move consumers along the curve; non-price determinants shift the curve.
Change in quantity demanded
caused only by a change in the good’s own price. A movement along the curve: an extension (price falls) or a contraction (price rises).
Change in demand
caused by a change in a non-price determinant. The whole curve shifts: an increase (right) or a decrease (left) in demand.

✏️Worked example

Three students are the only buyers of coffee at a campus kiosk. Their weekly demand schedules are:
price / Rp thousand
10, 8, 6, 4
Ayu
1, 2, 3, 4
Budi
0, 1, 3, 5
Citra
2, 3, 4, 5
(a) Construct the market demand schedule and plot it.
(b) The price rises from Rp 6 thousand to Rp 8 thousand. State the change in quantity demanded and explain whether the demand curve shifts.
(c) A rival kiosk opens next door selling iced tea at a lower price. Explain the likely effect on the market demand for coffee at the kiosk.

(a) Add the three quantities at each price: at Rp 10k, 1 + 0 + 2 = 3; at 8k, 2 + 1 + 3 = 6; at 6k, 3 + 3 + 4 = 10; at 4k, 4 + 5 + 5 = 14 cups per week.

Individual demand curves for Ayu, Budi and Citra, dashed, and the market demand curve through 3 cups at 10 thousand rupiah, 6 at 8, 10 at 6 and 14 at 4. Labels show 3 plus 1 plus 2 equals 6 and 3 plus 3 plus 4 equals 10.
Market demand is found by adding quantities across at each price.

(b) Quantity demanded falls from 10 to 6 cups a week, a fall of 4 cups. The demand curve does not shift: this is a movement along it (a contraction), because only the good’s own price changed.

(c) Cheaper iced tea is a close substitute. Some students switch to it, so at every price fewer cups of coffee are demanded: the market demand curve for the kiosk’s coffee shifts left.

Check it. The market curve must lie to the right of every individual curve and have the same price on each row. The market quantity at each price is always at least as large as the largest individual quantity: 10 ≥ 4 at Rp 6k.
“Price rises, so demand falls.” This loses marks. A rise in price reduces the quantity demanded; demand (the whole curve) is unchanged. Write “quantity demanded” every time you mean a movement along the curve.

📝Practise

Work through these on paper, then reveal the answer. Questions tagged with a session are modelled on a real IB question from that session: same topic, skill and marks, but our own wording and context.

1. [2 marks, Paper 2 style] Define the term complementary goods.
Goods that are consumed/used together, so that a rise in the price of one leads to a fall in demand for the other (negative cross-price relationship). Example: cars and petrol.
2. [4 marks, Paper 2 style] Using a demand and supply diagram, explain the effect on the market for rice of a rise in household incomes, if rice is an inferior good for most households.
For an inferior good, demand falls as income rises, because households switch to more expensive foods such as meat or bread. The demand curve for rice shifts left (D1 to D2). At the original price there is now excess supply, so the price falls, and the new equilibrium has a lower price and a lower quantity. Diagram: axes Price and Quantity, S, D1, D2, both equilibria marked with P and Q labels on the axes.
3. [10 marks, Paper 1 (a) — modelled on May 2024 SL Paper 1 Q1(a)] Explain how a fall in the price of motorcycles might affect the markets for petrol and for public bus travel.

A fall in the price of motorcycles causes an extension of demand for motorcycles (movement along D), so more people own and ride them.

Petrol is a complement: more motorcycles means more petrol used, so demand for petrol increases (shifts right). With an upward-sloping supply curve, the price and quantity of petrol both rise. Bus travel is a substitute: commuters switch from buses to motorcycles, so demand for bus travel decreases (shifts left): fewer passengers and, in a free market, lower fares.

Top-band answers draw two labelled diagrams (one per market), define substitutes and complements, and explain the chain of reasoning rather than just stating the outcome. If bus fares are fixed by the government, note that the fall in demand shows up as fewer passengers rather than a lower price.

4. [10 marks, Paper 1 (a) — modelled on November 2024 SL Paper 1 Q1(a)] Explain, with diagrams, why a surge in tourist arrivals raises both hotel room rates and bookings, while a rise in room rates on its own reduces bookings.

These are two different things. More tourists is a change in a non-price determinant (number of consumers), so the whole demand curve shifts right. At the old price there is a shortage of rooms; hotels raise prices; the new equilibrium has a higher price and more rooms booked.

A rise in the price of rooms, by itself, is a change in the good’s own price, so there is a movement along the existing demand curve: quantity demanded contracts, because of the substitution effect (guests switch to villas, guesthouses or other destinations), the income effect (their budgets buy less) and diminishing marginal utility (an extra night is worth less than the first).

Use two diagrams: a demand shift with the new equilibrium, and a movement along one demand curve.

5. HL Explain how the income and substitution effects together explain the law of demand for a normal good.
When the price falls, the substitution effect makes the good cheaper relative to alternatives, so consumers switch towards it. The income effect raises real income, and for a normal good higher real income increases the quantity bought. Both effects work in the same direction, so a lower price leads to a higher quantity demanded: the demand curve slopes downwards.
6. State whether each of the following shifts demand for electric scooters, moves along it, or neither: (a) the price of electric scooters falls; (b) petrol prices rise; (c) consumers expect scooter prices to fall next year; (d) a new battery technology cuts production costs.
(a) Movement along (extension): own price. (b) Shift right: petrol scooters are substitutes, and costlier petrol makes them less attractive. (c) Shift left today: consumers delay buying. (d) Neither for demand: this shifts supply right; the lower price that follows moves consumers along the demand curve.

🔗Go deeper — other people’s work

These are external resources, not mine. If one stops working, tell me and everything above it on this page still stands.

  • Khan Academy — Demand and the law of demand and Change in demand versus change in quantity demanded.
  • Marginal Revolution University — short videos on the demand curve and what shifts it.
  • CORE Econ, The Economy — chapter 8 on supply and demand with real price data.