Demand

What is a demand?

The demand curve

Demand is the willingness and ability of a person or group to buy a product at each price in a given time period. It is important to note that it is both willing and able. Although I might like an Aston Martin, I cannot afford one and so should not be counted as part of the demand for their cars.

Demand is represented in economics by a demand curve as shown on the left. Although we will refer to demand and supply curves during the course they will mostly be drawn as straight lines. If you go on to study A-level Economics, you will start to work with more complex models that frequently include curves.

You need to be able to draw a demand curve. The key features to remember are:

The demand curve slopes downward from left to right because the lower the price of something the higher the demand for it.

The demand curve should have axis labels of price(P) and quantity(Q) and the demand curve itself should be labelled(D).

Individual and market demand

Individual demand is the demand one individual or firm might have for a product at each price in a given time period. As it is just the choice of one person it can be quite volatile.

Market demand is the total demand for a product from all potential customers in the market. This gives a more balanced view of the products potential.

If we were talking about demand for meals from the student cafeteria, then individual demand would be the demand that one student has for meals from the cafe. The total demand would be the demand from all students who might buy food from the cafeteria.

Expansion and Contraction of demand

Expansion of demand

If the price of a product changes, then there will be a movement along the demand curve.

If the price goes down as shown on the left, then there will be a corresponding expansion of demand.

If the price goes up as shown on the right, then there will be a corresponding contraction of demand.

The law of demand states that price and quantity demanded are inversely related i.e. if price goes of quantity demanded goes down and vice versa.

The law holds true because as the price is lowered consumers who already bought the product might buy more of it and those that thought it was too expensive may now buy it.

Contraction of demand

Shifts of the demand curve

Left shift of demand

There are a series of factors that might cause the entire demand curve to shift to the left or the right. A left shift of demand means there is less demand at every price and a right shift of demand means there is more demand at every price.

Factor that shifts demand How it shifts demand
Government policies If the government rases taxes then people have less money left to spend and so there is likely to be a left shift of demand. If taxes are reduced, they will have more money so there would be a right shift of demand. The government might also subsidise certain goods or services. This might increase the demand for these goods and services, meaning a right shift of demand.
Income If average incomes are rising then people have more to spend and there will be a right shift of demand. If average incomes fall there would be a left shift of demand.
Marketing If there is a successful marketing campaign it will cause a right shift of demand for a product. In today's world of social media, it could be that failure to deal with a social media problem could cause a left shift of demand.
Population The population might rise or fall due to births and deaths and immigration and emigration. If the population rises, there are more people to buy products and demand shifts to the right. If the population decreases, there will be a left shift of demand. Populations have demographics like age and gender distributions. As these change, it may change the demand for certain types of products that target certain areas.
Price expectations If the price of a product is expected to rise in the future, then more of it will be demanded now by people who are stockpiling at the cheaper price and those trying to buy it so they can profit later at the higher price.
Economic situation When the economic outlook is bad people are more likely to save and so there will be a left shift of demand. When times are good people are more likely to take out loans which might mean an increase in spending on big ticket items like cars and electronics.
Tastes and fashion When tastes change, and a product becomes more fashionable there is a right shift of demand and when if it becomes less fashionable there is a left shift of demand.
Substitutes and compliments A substitute is a product someone might buy instead of your product. If the price of one of your competitors products goes down, then some of your customers might buy that instead meaning a left shift of demand. if the price of the substitute goes up then their customers may buy your product causing a right shift of demand. A complimentary good is one that goes with your product e.g. a coffee maker and the pods that go in it. If the price of one goes up e.g. the coffee pods, it makes the other product, the coffee maker, less attractive meaning a left shift of demand. But if the price of a complimentary good goes down then it could lead to a right shift of demand.

When I am trying to learn lists like this, I like to use methods to jog my memory. For me it helps to make silly things as I remember them better. The first letters of these factors spell out GIMPPETS which made me giggle. Perhaps you will need to come up with your own memorable one or a memory jingle.

Right shift of demand

Elasticity of demand

Type of demand Explanation
Elastic demand

Elastic demand is when any percentage change in the price of a good will lead to a greater percentage change in the demand for the good in the opposite direction.

If the price of a good goes up by 10% then there will be a greater than 10% decrease in the quantity demanded. If it goes down by 10% there will be a greater than 10% increase in quantity demanded.

Products that have a lot of substitutes and big ticket items you have to save up a long time for tend to have elastic demand.
Perfectly elastic demand

Perfectly elastic demand is when any quantity of a good will be bought at one but only one price.

This is not a very realistic situation. A close comparison to this situation is the idea of a price comparison site. Once people find say the hotel room they want to book they may book but only at the lowest price available. People will not choose the more expensive options for the same thing.
Inelastic demand

Inelastic demand is when any percentage change in the price of a good will lead to a smaller percentage change in the demand for the good in the opposite direction.

If the price of a good goes up by 10% then there will be a less than 10% decrease in the quantity demanded. If it goes down by 10% there will be a less than 10% increase in quantity demanded.

Products that have a lot of substitutes and big ticket items you have to save up a long time for tend to have elastic demand.
Perfectly inelastic demand

Perfectly inelastic demand is when a change in price will have no effect on quantity demanded.

This is not a very realistic situation. A close comparison to this situation is when there is a unique or at least very rare item for sale.
Unitary elastic demand

Unitary elastic demand is where the percentage change in price will exactly match the percentage change in quantity demanded.

This is another highly unlikely scenario in real life.

The importance of elasticity of demand

The importance to consumers

Although it is much more likely that businesses will be aware of PED consumers are still affected by it. There are many instances where businesses offer different prices to those whose demand is flexible and can use their services at off peak times. Cinemas may offer discounts for matinee screenings or midweek sessions. Trains charge different price for off-peak tickets. Holidays will be cheaper outside of school term breaks.

Goods like tobacco, alcohol and fuel which are inelastic mean the government can raise taxes significantly on these and demand will not fall much so they will make more money.

The importance to producers

For producers knowing whether you have elastic or inelastic demand can be crucial to maximising your profits. The example on the right shows the effect of raising the price and lowering the price for a firm with an elastic PED and one with an inelastic PED. The results this test show always hold true.

If a product has elastic PED, then lowering its price will mean a greater percentage increase in quantity demanded and so increased revenue. If a product has inelastic demand, then raising its price will result in a smaller percentage change in quantity demanded and so revenue will increase. For each type of firm doing the opposite will reduce total revenue.

It is important to recognise that these cannot go on indefinitely. A firm with inelastic demand cannot simply just go on raising prices forever. Similarly, firms cannot continue to reduce prices when they cannot meet their costs.

Knowledge check


Questions:
Correct:

Question text


Exam style questions

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Questions

Explain what is meant by demand. (2 marks)


The willingness and ability(1) to buy a good or service at each price in a certain time period.(1)

Explain what the law of demand is. (2 marks)


The demand for a good or service is inversely related to the price(1) i.e. as the price rises demand falls and vice versa.(1)

Explain how the difference between individual demand and market demand. (2 marks)


Individual demand is the amount of a good or service that an individual would buy at each price in a given time period(1)

Market demand is the total demand from all potential customers at each price in a given time period.(1)

Draw an elastic demand curve. (2 marks)


You don't have to draw the dotted lines but you need to make sure you labelled the x and y axis and the demand curve itself.

You should have drawn something that is very flat and nowhere near 45 degrees.

1 mark for the line at the right angle, 1 mark for all the labels.

Explain what price elasticity of demand is. (2 marks)


The responsiveness of demand(1) to a change in price.(1)

Case study/Scenario

Wimmers Soft Drinks is a small regional soft drink manufacturer. Their drinks tend to be slightly more expensive than the big players in the soft drink industry but they are made without preservatives and artificial sweeteners.

Analyse the factors that could lead to a right shift of demand for Wimmers Soft Drinks. (6 marks)


Sample answer:
If average incomes rise then people can afford more luxury goods like soft drinks {AO1} Because Wimmers makes premium drinks this could benefit them as more people can afford to try their product.{AO2} This may lead to people enjoying it and becoming regular customers and demand increasing{AO3a} which if sustained will mean higher profits in the future.{AO3a}

If tastes change such that artificial sweeteners become less popular then people will be more likely to buy Wimmers soft drinks. {AO2} This coukd lead to an increasin reveneue and more profit for Wimmers.{AO3a}

Additional notes:
Make sure you are in context. Here I have talked about soft drinks and mentioned the point made in the scenario about them being a premium brand.

It's an analyse question so you are looking to provide a piece of knowledge. Then you need to apply it twice and analyse what that means.

There is no need for a concluding statement.

Other arguments you could have put forward include a successful marketing campaign, an increase in the size of the population, an increase in the price of substitutes or the scrapping of the sugar tax.


Case study/Scenario

Franz is a retired carpenter with 5 grandchildren. He was disappointed with the quality of the toys his grandchildren had with most items made of plastic and easily breakable. Franz decided to use his spare time to create wooden toy trucks and cars like the ones he grew up with that are harder to break. He sells these from November until Christmas at his local market in the town square every Sunday. He uses the money from selling the toys to treat his grandchildren.

Recently he has been talking to Renata who runs the stall next door selling hand-made paper products. She has said she thinks demand for his toys is price elastic as she found her paper products were.

Evaluate the importance of price elasticity of demand to Franz. (6 marks)


Sample answer:
If Renata is correct and his toys have price elastic demand{AO2}then if he lowers the price of his toys by 5% then he will sell more than 5% more toys and make more revenue{AO3a} and this will likely lead to increased profits giving him more money to spend on his grandchildren.{AO3a}

However, it may be that maximising profit is not Franz' main goal. After all, originally providing a quality product was very important to him. {AO3b} It may also be that making more toys would turn it from a hobby into a job and take up too much of his time. {AO3b}

If Franz wants to maximise his profits so he has more to spend on his grandchildren then knowing his PED will be important in making the right rice decisions to maximise his revenue. But if Franz feels he gets out of it what he needs to and would not be comfortable giving up more time to complete the work or might worry the quality might drop then it will not be important to him.{AO3b}

Additional notes:

By mentioning talking about toys instead of goods and referncing information from the scenario such as his interest in quality we ensure the answer is in context.

Because it's an evaluate you should be looking for both sides of the argument.

When it comes to the final statement you are not saying whether you think it will be important or not but giving the circumstances where each might be the case for Franz.



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