Everything in microeconomics is built on two lines. This page is the first one. The idea itself is obvious — things sell better when they are cheaper — but the marks come from saying why in the right words, drawing the curve properly, and never confusing a movement along it with a shift of it.
📚 What you need to know
Demand is the quantity of a good consumers are willing and able to buy at a given price in a given time period.
Willing but not able is not demand. Economists call the real thing effective demand.
The law of demand: price and quantity demanded have an inverse relationship, ceteris paribus.
The demand curve therefore slopes downwards from left to right.
Three reasons why: the income effect, the substitution effect and diminishing marginal utility.
Market demand is found by adding up every individual’s demand at each price level.
A price change causes a movement along the curve: an extension (price falls) or a contraction (price rises).
What demand actually means
In everyday speech, “demand” means wanting something. In economics it means something narrower: wanting it and being able to pay for it, at a stated price, over a stated period.
You might want a sports car. If you cannot afford one, you are not part of the demand for sports cars. Economists sometimes stress this by calling it effective demand — desire backed by money.
Always attach a price and a time period. “Demand for coffee is 500” is meaningless. “At $4 a cup, 500 cups are demanded per day” is a proper statement of demand.
The law of demand
The law of demand
As price rises, quantity demanded falls.
As price falls, quantity demanded rises. Ceteris paribus.
Notice the ceteris paribus at the end. The law only holds if nothing else changes. If the price of a phone rises but incomes double at the same time, sales might well go up — and the law of demand is not broken, because more than one thing moved.
Why the curve slopes down — three reasons
Reason
What it says
Example
The income effect
A lower price raises your real purchasing power, so the same wage buys more
Bus fares fall from $3 to $2, so your weekly travel budget now stretches to more journeys
The substitution effect
When a good gets relatively dearer, buyers switch to alternatives that now look better value
Rice gets more expensive, so households buy more pasta instead
Diminishing marginal utility
Each extra unit gives less satisfaction than the last, so you will only buy more if it is cheaper
The fourth slice of pizza is worth far less to you than the first
Diminishing marginal utility is the neatest of the three reasons. Line up the falling bars and you have already sketched a downward-sloping demand curve.
Do not just list the three reasons in an exam. Pick one, name it, and explain it in a sentence with a real product. One well-explained reason beats three bare labels every time.
Drawing the demand curve
Price always goes on the vertical axis, quantity on the horizontal. Economists draw demand as a straight line even though real data would be a curve — a straight line makes the analysis far easier and nothing important is lost.
Nothing has shifted here. It is the same curve throughout — the consumer has simply slid to a different point on it because the price changed.
The words examiners want
Price rises → a contraction in quantity demanded (some call it a movement up the curve).
Price falls → an extension in quantity demanded.
Either way, say “quantity demanded”, never just “demand”. Demand only changes when the whole curve moves.
The one-sentence rule. If the cause is the price of the good itself, you move along the curve. If the cause is anything else, the curve shifts. That is the whole of the next page in one line.
From individual demand to market demand
Market demand is just everybody’s individual demand added together at each price. You add across horizontally — keep the price fixed and sum the quantities.
With two buyers the sum is easy. A real market adds thousands of individual curves, which is why the market curve looks so much flatter than any one person’s.
Worked examples
WORKED EXAMPLE 1
Three households buy oranges. At $2/kg, Household A buys 5 kg, B buys 8 kg and C buys 3 kg. At $3/kg they buy 3 kg, 5 kg and 1 kg. Construct the market demand at each price and state what this shows. [3]
Step 1: add horizontally at $25 + 8 + 3 = 16 kgStep 2: add horizontally at $33 + 5 + 1 = 9 kgStep 3: interpret
Price rose from $2 to $3 and market quantity demanded fell from 16 kg to 9 kg.
This is the law of demand: an inverse relationshipSay “inverse”, not “opposite”. It is the mark scheme word.
WORKED EXAMPLE 2
Explain, using one of the assumptions behind the law of demand, why fewer cinema tickets are bought when the price rises from $9 to $14. [4]
Step 1: name the assumption
The substitution effect.
Step 2: state what it means
When a good becomes relatively more expensive, buyers switch to alternatives that now look better value.
Step 3: apply it to this market
At $14 the cinema is dear relative to streaming a film at home, so some consumers switch.
Step 4: state the result in the right language
There is a contraction in quantity demanded — a movement up the same demand curve.
Name it, define it, apply it, label the movementWriting “demand falls” here would cost you a mark. Demand did not change; quantity demanded did.
WORKED EXAMPLE 3
A student writes: “I really want a new laptop but I can only afford a second-hand one.” Is the student part of the demand for new laptops? Explain. [2]
Step 1: recall the definition
Demand requires being willing AND able to buy at the going price.
Step 2: apply it
The student is willing but not able, so this is desire rather than effective demand.
No — wanting something is not demandThe student is, however, part of the demand for second-hand laptops.
💡 Exam tip
Label the axes fully: “Price of X ($)” and “Quantity of X (units per week)”. Bare P and Q loses marks.
Label the curve D at the end of the line, and mark any point you refer to with a letter.
Use dashed guide lines from both axes to any point you discuss.
Say “quantity demanded” for movements and “demand” only for shifts. Examiners test this every session.
Add “ceteris paribus” when you state the law. It is often worth a mark on its own.
Explain one reason well rather than listing all three of the income effect, substitution effect and diminishing marginal utility.
⚠ Common mix-up
Saying “demand fell” when the price rose. Quantity demanded fell. Demand is the whole curve.
Putting quantity on the vertical axis. Price is always vertical in these diagrams.
Thinking wanting something counts. Without the ability to pay it is not effective demand.
Adding individual demands vertically. You add across at a fixed price, not up.
Forgetting the time period. Demand is always per day, per week or per year.
Claiming the law of demand is broken when sales rise after a price rise. Usually something else changed too, so ceteris paribus did not hold.
Up next: What Shifts a Demand Curve — the five things that move the whole curve, and how to tell them apart from a price change.
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