Demand, Price & Quantity (DP IB Economics)

Introduction to 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.  Economists, however, use straight lines so as to make analysis easier
     

• The law of demand states that there is an inverse relationship between price and quantity demanded (QD), ceteris paribus

  • When the price rises the QD falls

  • When the price falls the QD rises
     

Individual and Market Demand

• Market demand is the combination of all the individual demand for a good/service

  • It is calculated by adding up the individual demand at each price level
      

The Monthly Market Demand for Newspapers in a Small Village

• Individual and market demand can also be represented graphically
   

  

Market demand for children's swimwear in July is the combination of boys and girls demand

Diagram Analysis

• A shop sells both boys and girls swimwear

• In July, at a price of $10, the demand for boys swimwear is 500 units and girls is 400 units

• At a price of $10, the shops market demand during July is 900 units

Assumptions Underlying the Law of Demand

• The law of demand is based on three key assumptions:

  • The income effect

  • The substitution effect

  • The law of diminishing marginal utility
    

• These three assumptions collectively contribute to the understanding of the law of demand and how consumers' behaviour is influenced by changes in price

  • The income effect and substitution effect highlight how changes in price affect consumers' purchasing power and their choices among different goods

  • The law of diminishing marginal utility explains why consumers are less willing to pay higher prices for additional units of a good
    

An Explanation of the Three Assumptions

Movements Along a Demand Curve

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

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

A demand curve showing a contraction in quantity demanded (QD) as prices increase and an extension in quantity demanded (QD) as prices decrease
 

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