Demand (Edexcel A Level Economics A)

Demand

• Demand is the amount of a good/service that a consumer is willing and able to purchase at a given price in a given time period

  • If a consumer is willing to purchase a good, but cannot afford to, it is not effective demand

• A demand curve is a graphical representation of the price and quantity demanded (QD) by consumers

  • If data were plotted, it would be an actual curve; however, economists simplify curves in their sketches into straight lines to make analysis easier

Movements along a demand curve

• If price is the only factor that changes (ceteris paribus), there will be a change in the QD

  • This change is shown by a movement along the demand curve

Diagram analysis

• An increase in price from £10 to £15 leads to a movement up the demand curve from point A to B

  • Due to the increase in price, the QD has fallen from 10 to 7 units

  • This movement is called a contraction in QD

• A decrease in price from £10 to £5 leads to a movement down the demand curve from point A to point C

  • Due to the decrease in price, the QD has increased from 10 to 15 units

  • This movement is called an extension in QD

• The law of demand captures this fundamental relationship between price and QD

  • It states that there is an inverse relationship between price and QD

    • When price rises, the QD falls

    • When prices fall, QD rises

• This relationship partly explains why the demand curve is downward sloping

Conditions of Demand

Shifts of the entire demand curve

• There are numerous factors that will change the demand for a good/service, irrespective of the price level. Collectively, these factors are called the conditions of demand

• Changes to each of the conditions of demand shift the entire demand curve (as opposed to a movement along the demand curve)
  

• For example, if a firm increases their Instagram advertising, there will be an increase in demand as more consumers become aware of the product

  • This is a shift in demand from D to D₁. The price remains unchanged at £7 but the demand has increased from 15 to 25 units

An Explanation of How Each of the Conditions of Demand Shifts the Entire Demand Curve at Every Price Level

Diminishing Marginal Utility

• Marginal utility is the extra utility (satisfaction) gained from the consumption of an additional unit of a product

• The utility gained from consuming the first unit is usually higher than the utility gained from consuming the next unit

  • For example, a hungry consumer gains high utility from eating their first hamburger. They are still hungry and purchase a second hamburger but gain less satisfaction from eating it than they did from the first hamburger

• To calculate total utility, the marginal utility of each unit consumed is added together

  • This means that total utility keeps increasing even while marginal utility is decreasing

• The Law of Diminishing Marginal Utility states that as additional products are consumed, the utility gained from the next unit is lower than the utility gained from the previous unit

• The Law of Diminishing Marginal Utility helps to explain the reason why the demand curve is downward sloping

  • When the first unit is purchased, the utility is high and consumers are willing to pay a higher price

  • When subsequent units are purchased, each one offers less utility and the willingness of the consumer to pay the initial price decreases

  • Lowering the price makes it a more attractive proposition for the consumer to keep consuming additional units

  • This is one reason why firms offer discounts such as '50% off the second item.'