Demand » Demand and the Demand Curve
What you'll learn this session
Study time: 30 minutes
Cambridge spec: 2.2.1
- Define demand and effective demand
- Use a demand schedule and add individual demands to find market demand
- Draw and interpret a demand diagram
- Explain why the demand curve slopes downward
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Unlock This CourseWhat is demand?
Wanting it isn't enough: demand means being willing and able to pay
Imagine a new phone costs $900. You might love it, but if you cannot pay for it, you are not going to buy it. Now imagine the same phone costs $90. Far more people could, and would, buy it. Economists use the word demand to describe this link between price and buying.
The last lesson showed that buyers and sellers meet in markets. This lesson looks at the buyers' side of the market in more detail.
Key terms:
- Demand: the willingness and ability to buy a good at a given price over a period of time.
- Effective demand: a want that is backed by the ability to pay. It is the demand that can actually lead to a sale.
- Demand schedule: a table showing the quantities demanded at different prices.
- Individual demand: the demand of one buyer for a good.
- Market demand: the total demand of all the buyers in a market for a good.
- Demand curve: a line on a diagram showing the quantity demanded at each price.
Willingness, ability and time
The definition of demand has three parts. All three matter.
👍 Willingness
The buyer wants the good and is prepared to buy it at that price.
💰 Ability
The buyer has the money to pay for it.
📅 Period of time
Demand is always for a time, such as per day, per week or per year.
A want without the ability to pay is not effective demand. A student who dreams of owning a sports car has a want, but with no money it does not count as effective demand. A firm only notices effective demand, because only effective demand leads to a sale.
Demand is also linked to a price. Saying "I demand 5 smoothies" means little. Saying "I would buy 5 smoothies a week at $3 each" is demand.
The demand schedule
A demand schedule lists a price and the quantity a buyer would be willing and able to buy at that price. Here is the weekly demand of Lina for fruit smoothies at a school cafe in the made-up country of Santara.
| Price per smoothie ($) | Lina's quantity demanded per week |
|---|---|
| 6 | 1 |
| 5 | 2 |
| 4 | 3 |
| 3 | 4 |
| 2 | 5 |
As the price goes down, Lina wants to buy more. This table shows individual demand, because it covers only one buyer.
From individual demand to market demand
Add every customer's smoothie order at each price and you get market demand
A cafe has many customers, not just one. To find market demand, add up the individual demands of all the buyers at each price. Here are three students at the cafe.
| Price ($) | Lina | Tariq | Kofi | Market demand |
|---|---|---|---|---|
| 6 | 1 | 0 | 2 | 3 |
| 5 | 2 | 1 | 3 | 6 |
| 4 | 3 | 2 | 4 | 9 |
| 3 | 4 | 3 | 5 | 12 |
| 2 | 5 | 4 | 6 | 15 |
Read across each row. At $4 the market demand is 3 + 2 + 4 = 9 smoothies a week. Tariq's demand is 0 at $6. He may like smoothies, but at $6 he is not willing or able to pay, so he has no effective demand at that price.
Market demand gets bigger when there are more buyers, because there are more individual demands to add up.
Drawing the demand diagram
The demand curve is drawn from the market demand column of the table. In the exam, follow these steps.
- Draw two axes. Label the vertical axis Price ($) and the horizontal axis Quantity (smoothies per week).
- Choose an even scale on each axis, for example $1 steps up the side and 3 smoothies at a time along the bottom.
- Plot each price with its market demand: (3, $6), (6, $5), (9, $4), (12, $3) and (15, $2).
- Join the points with a line that runs from the top left to the bottom right. It can be a straight line or a gentle curve. Many exam diagrams use a straight line.
- Label the line D for demand.
Worked example
Use the market demand table above. A student wants to know how many smoothies are demanded when the price is $3. Find $3 on the vertical axis, move across to the demand curve D, then go straight down to the quantity axis. The market demand is 12 smoothies a week. Reading the other way, if the cafe wants to sell 9 smoothies a week, the price must be $4.
The curve slopes downward from left to right. This shows that a higher price means a lower quantity demanded, and a lower price means a higher quantity demanded.
Why does the demand curve slope downward?
There are three common reasons why people buy more when the price falls.
💲 Buyers can afford more
A lower price means the same money buys more. Buyers feel better off, so they can afford a larger quantity. This is called the income effect.
🔄 Other goods look dearer
When the price of a good falls, it becomes cheaper than similar goods, so some buyers switch to it. This is called the substitution effect.
🍰 Less satisfaction from each extra one
The first smoothie of the week is enjoyed the most. Each extra one gives a little less satisfaction, so buyers only want more if the price is lower.
A lower price may also bring in new buyers who could not afford the good before. That adds to market demand.
Common mistakes
1. Leaving out the ability to pay when defining demand. Wanting a good is not enough. 2. Forgetting the time period. 3. Putting Price on the horizontal axis. Price goes on the vertical axis. 4. Not labelling the axes or the curve. 5. Adding prices together to find market demand. You add the quantities at each price, never the prices. 6. Drawing a demand curve that slopes upward.
Exam-style question
Cinema tickets are sold in the town of Kessora, in the made-up country of Dorland. The table shows the weekly demand for tickets of two regular cinema-goers, Ana and Ben.
| Price per ticket ($) | Ana | Ben |
|---|---|---|
| 8 | 2 | 1 |
| 6 | 3 | 2 |
| 4 | 4 | 3 |
(a) Define demand. [2 marks]
(b) Calculate the market demand for tickets at $6 and at $4, assuming Ana and Ben are the only buyers. [2 marks]
(c) Describe how the market demand curve would be drawn from the table. [3 marks]
(d) Explain why the demand curve for cinema tickets slopes downward. [3 marks]
Model answer
(a) Demand is the willingness (1) and ability to buy a good at a given price over a period of time (1).
(b) At $6: 3 + 2 = 5 tickets (1). At $4: 4 + 3 = 7 tickets (1).
(c) Put Price on the vertical axis and Quantity on the horizontal axis (1). Plot the market demand at each price, such as 3 tickets at $8, 5 at $6 and 7 at $4 (1). Join the points with a line sloping downward and label it D (1).
(d) When the price falls, buyers can afford more tickets with the same money (1). Cinema tickets become cheaper compared with other types of entertainment, so some buyers switch to the cinema (1). A lower price may also bring in new buyers, so the quantity demanded rises as price falls (1).
Exam tip
In part (b), show your addition, such as 3 + 2 = 5. In part (d), always give a reason for the downward slope and then say what happens to quantity demanded. Do not just state that the curve slopes down.