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This lesson covers the theory of demand — one of the two fundamental building blocks of microeconomic analysis. You will learn about individual and market demand, the law of demand, movements along versus shifts of the demand curve, and the conditions (determinants) of demand. Understanding demand thoroughly is essential for AQA A-Level Economics Papers 1 and 3.
Key Definition: Demand is the quantity of a good or service that consumers are willing and able to purchase at a given price, in a given time period.
Note the two critical conditions: willingness and ability. A consumer may want a Ferrari, but if they cannot afford one, this does not constitute demand in the economic sense. Demand must be effective demand — backed by purchasing power.
Key Definition: The law of demand states that, ceteris paribus, as the price of a good rises, the quantity demanded falls, and vice versa. There is an inverse (negative) relationship between price and quantity demanded.
This relationship was formalised by Alfred Marshall (1890) in his Principles of Economics, where he developed the now-standard supply and demand diagram with price on the vertical axis and quantity on the horizontal axis.
There are three main explanations for the downward-sloping demand curve:
The income effect: When the price of a good falls (ceteris paribus), consumers' real income effectively increases — they can afford more of the good (and other goods) with the same nominal income. This encourages them to buy more.
The substitution effect: When the price of a good falls relative to substitutes, consumers switch away from the now relatively more expensive substitutes towards the cheaper good.
Diminishing marginal utility: Each additional unit of a good consumed provides less additional satisfaction (utility) than the previous unit. Consumers will therefore only buy more units if the price falls — they need a lower price to compensate for the reduced marginal utility of extra units. This principle was developed by economists including William Stanley Jevons (1871) and Carl Menger (1871).
Exam Tip: When explaining why the demand curve slopes downward, use both the income and substitution effects. Many students only mention one. For top marks, briefly explain both and link them to the inverse price-quantity relationship.
For example, if at a price of £5, Consumer A demands 3 units and Consumer B demands 5 units, the market demand at £5 is 8 units. The market demand curve is found by adding up the quantities demanded by all consumers at each price level.
Exam Tip: "Horizontal summation" means adding up quantities (on the x-axis) at each price level. Do not add up the prices — that would be vertical summation, which is used for public goods but not market demand.
A demand schedule is a table showing the quantity demanded at different price levels:
| Price (£) | Quantity Demanded (units per week) |
|---|---|
| 1 | 100 |
| 2 | 80 |
| 3 | 60 |
| 4 | 40 |
| 5 | 20 |
When these points are plotted on a graph with price on the vertical axis and quantity on the horizontal axis, and connected, they form the demand curve. By convention, demand curves slope downward from left to right.
Note: In economics, the demand "curve" is often drawn as a straight line for simplicity. This is acceptable at A-Level unless the question specifically requires a curved line.
Key Definition: A movement along the demand curve occurs when there is a change in the quantity demanded caused by a change in the good's own price, ceteris paribus.
| Term | Meaning | Cause |
|---|---|---|
| Extension of demand | Quantity demanded increases | Price falls |
| Contraction of demand | Quantity demanded decreases | Price rises |
| Increase in demand | The whole curve shifts right | Non-price factor changes |
| Decrease in demand | The whole curve shifts left | Non-price factor changes |
Exam Tip: Never say "demand increases" when you mean "quantity demanded increases." The former implies a shift of the whole curve; the latter implies a movement along it. This is one of the most common errors in A-Level economics and examiners penalise it heavily. Use precise language.
Key Definition: A shift of the demand curve occurs when there is a change in demand at every price level, caused by a change in a non-price factor (a condition of demand).
A shift to the right means more is demanded at every price (increase in demand). A shift to the left means less is demanded at every price (decrease in demand).
The following factors cause the demand curve to shift. These are the non-price determinants of demand:
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