Step 6: Demand
- Demand is the quantity of a good consumers are willing and able to buy at each possible price, in a given time period, ceteris paribus.
- The Law of Demand: as price rises, quantity demanded falls, so the demand curve slopes downward. Three reasons: the income effect, the substitution effect and diminishing marginal utility.
- A change in the good’s own price causes a movement along the curve. A change in any non-price factor shifts the whole curve.
- Exam point: “demand increased” means the curve shifted right; “quantity demanded increased” means a movement along it. Mixing them up costs marks every year.
What demand means: wanting is not enough
You might want a new sports car. But if you cannot pay for one, the car dealer will never notice your wish. In everyday speech, “I want it” sounds like demand. In economics it is not. Demand needs two things: you must be willing to buy and able to pay. Demand backed by the money to pay is called effective demand.
Demand is also not a single number. It is a relationship between price and quantity. At $5 a cup, a café’s customers might buy 50 coffees a week. At $3, perhaps 70. At $10, perhaps only 10. All of these together are the demand for coffee.
A table of these price and quantity pairs is a demand schedule. Plot it with price on the vertical axis and quantity on the horizontal axis and you get the demand curve. Here is a schedule for coffee in a small town:
| Price per cup ($) | Quantity demanded (cups per week) |
|---|---|
| 6 | 200 |
| 5 | 350 |
| 4 | 500 |
| 3 | 700 |
| 2 | 1,000 |
The Law of Demand and why the curve slopes down
Look at the schedule. As the price falls, people buy more. As it rises, they buy less. This inverse relationship is the Law of Demand, one of the most reliable patterns in economics.
There are three reasons for it:
- The income effect. When a price falls, your money stretches further: your real purchasing power rises. If coffee halves in price, your morning budget covers an extra cup.
- The substitution effect. When a good gets cheaper compared with its substitutes, people switch to it. If coffee falls in price but tea does not, some tea drinkers switch to coffee.
- Diminishing marginal utility. Each extra unit gives you less extra satisfaction (utility) than the one before. You might pay $5 for your first coffee of the day, but not for a fifth. You only buy more if the price is lower.
Movement along the curve vs a shift of the curve
This is the most important distinction in this step, and the one students get wrong most often.
- Movement along the curve. Only the good’s own price changes, and nothing else does. Consumers slide from one point on the existing curve to another. This is a change in quantity demanded. In the schedule above, a price cut from $5 to $3 raises quantity demanded from 350 to 700 cups.
- Shift of the curve. A non-price factor changes, such as income or tastes. The whole curve moves: right if demand increases, left if it decreases. At every price, a different quantity is now demanded. This is a change in demand.
What shifts the demand curve?
The book lists six non-price determinants of demand, remembered with the mnemonic TINDER:
| Determinant | Shifts demand right when… | Example |
|---|---|---|
| Tastes and preferences | The good becomes more fashionable | A viral video makes a brand of trainers popular |
| Income | Income rises (for a normal good) | More restaurant meals and holidays |
| Number of buyers | Population grows or new markets open | Firms selling in China and India |
| Prices of relateD goods | A substitute gets dearer, or a complement gets cheaper | Tea rises in price, so coffee demand rises |
| Expectations | Buyers expect the price to rise later | House buyers rush in before prices climb |
| Government policies (Regulations) | A subsidy makes the good cheaper to own | Subsidies on electric vehicles |
Income: normal and inferior goods. For most goods, higher income means more demand. These are normal goods: smartphones, organic food, holidays. For some goods, higher income means less demand, because people trade up to something better. These are inferior goods: instant noodles, budget airlines, used clothing.
Related goods: substitutes and complements. Substitutes can replace each other: Coke and Pepsi, the bus and the train. If the price of a substitute rises, demand for your good rises. Complements are used together: printers and ink, cars and petrol. If the price of a complement rises, demand for your good falls, because the whole package costs more.
Real markets often see several shifters at once. When the iPhone launched in 2007, smartphones suddenly became desirable to ordinary people: a change in tastes. Over the following years, rising incomes in China and India, millions more buyers as networks spread, and cheaper mobile data (a complement) all pushed the demand curve further right. By 2023, global shipments were about ten times the 2007 level.
Individual demand and market demand
Individual demand is what one consumer buys at each price. Market demand is the total bought by all consumers at each price. You find it by adding up quantities at each price, which is called horizontal summation. You add across the quantity axis, never the prices.
A market has 500 identical consumers. Each one buys 4 units at $10, 7 units at $7 and 12 units at $4. Find market demand at each price. Then a recession cuts the number of buyers to 400. What is market demand at $7 now?
The market curve slopes down just like each individual’s. Losing 100 buyers reduces the quantity demanded at every price, so the market demand curve shifts left. That is the “number of buyers” determinant at work.
Practise: 6 questions
Try each one on paper first, then check the worked answer.
EasyQ1. Incomes rise and demand for instant noodles falls. What kind of good are instant noodles? Show worked answer
EasyQ2. Does a fall in the price of coffee shift the demand curve for coffee? Show worked answer
MediumQ3. Using the coffee schedule above (200 at $6, 350 at $5, 500 at $4, 700 at $3, 1,000 at $2): (a) If price falls from $5 to $3, what is the change in quantity demanded? (b) A new office opens nearby, adding 100 buyers’ worth of cups at every price. Write the new schedule. Movement or shift? Show worked answer
(b) New schedule: $6 → 300; $5 → 450; $4 → 600; $3 → 800; $2 → 1,100.
This is a rightward shift of the demand curve: a non-price factor (number of buyers) changed, so more is demanded at every price.
MediumQ4. For the demand curve for petrol, state whether it shifts left, shifts right or does not shift: (a) the price of petrol falls 20%; (b) the government subsidises electric cars; (c) consumer incomes rise. Show worked answer
(b) Shift left: electric cars are a substitute for petrol cars. The subsidy makes them cheaper, so some drivers switch and demand for petrol falls.
(c) Shift right, if petrol is a normal good: higher incomes mean more driving.
MediumQ5. The price of tea rises by 20%, and the quantity of coffee bought rises by 15% even though the price of coffee has not changed. (a) Are tea and coffee substitutes or complements? (b) Has the coffee demand curve shifted, or has there been a movement along it? Show worked answer
(b) The coffee demand curve has shifted right. The price of coffee did not change; a non-price factor (the price of a related good) did. At every price, more coffee is now demanded.
ExamQ6. Distinguish between a normal good and an inferior good. Give one example of each and explain how a rise in consumer income would affect each demand curve. [4 marks] Show worked answer
Example: organic food. As income rises, consumers switch from conventional to organic food, so the demand curve shifts right. (1)
An inferior good is one for which demand decreases when income rises. (1)
Example: instant noodles. As income rises, consumers switch to restaurant meals or fresh food, so the demand curve shifts left. (1)
Check yourself
1. The Law of Demand states that, ceteris paribus:
2. Which would shift the demand curve for smartphones to the RIGHT?
3. The market demand curve is found by:
Your score: 0 out of 3
The short version
- Demand is willingness and ability to buy at each possible price, ceteris paribus; it is a whole schedule, not one number.
- The demand curve slopes down because of the income effect, the substitution effect and diminishing marginal utility.
- Own-price change: movement along the curve (change in quantity demanded). Non-price change: shift of the curve (change in demand).
- Demand shifters (TINDER): tastes, income, number of buyers, prices of related goods, expectations, government policies. Know normal vs inferior goods, and substitutes vs complements.
- Market demand is the horizontal sum of all individual demand curves.
This guide covers the core of Chapter 5 of Economics Made Simple. The full chapter adds labelled demand diagrams, the full smartphone case study and a 15-question exam practice set with a full answer key.
Further reading on EconTutorials
Older in-depth articles on this topic from our blog: