Put the price up and people buy less. Everybody knows that already. What the exam wants is the reason why, drawn correctly, labelled correctly, and described using the exact words the mark scheme is looking for.
📚 What you need to know
Demand is the amount of a good or service a consumer is willing and able to buy at a given price in a given time period.
Wanting something you cannot afford is not effective demand.
The law of demand: price and quantity demanded have an inverse relationship, ceteris paribus.
Market demand is the sum of every individual demand at each price level.
Three assumptions sit underneath the law: the income effect, the substitution effect and diminishing marginal utility.
A price change causes a movement along the curve: a contraction when price rises, an extension when price falls.
What demand actually means
Demand is not the same as wanting something. The definition has two halves that both have to be true: a consumer must be willing to buy and able to buy, at a stated price, over a stated time period.
If someone would love a new car but cannot afford one, that is not demand in an economic sense. It is not effective demand, and it has no effect whatsoever on the market.
The law of demand
as price rises, quantity demanded falls | as price falls, quantity demanded rises — ceteris paribus
The demand curve is a graphical representation of the relationship between price and quantity demanded (QD). If you plotted real market data it would come out as an actual curve, with kinks and wobbles. Economists draw it as a straight line because it makes the analysis far easier and changes nothing important.
A to B: price rises from 12 to 18 and quantity demanded contracts from 8 to 5. A to C: price falls to 6 and quantity demanded extends to 11.
This is the vocabulary the mark scheme is built on. When price changes, quantity demanded changes and you move along the curve. Say “a contraction in quantity demanded”, not “demand fell”. Save the phrase “demand fell” for the next page, where the whole curve moves. Examiners test this distinction over and over, and it is free marks if your wording is precise.
Individual and market demand
Market demand is the combination of all the individual demand for a good or service. You calculate it by adding up the individual quantities demanded at each price level — adding horizontally across, not vertically.
Price
Amir
Ben
Cara
Dee
Market demand
$8
4
2
3
1
10
$6
10
5
7
3
25
$4
18
9
12
6
45
$2
30
15
20
10
75
Only two buyers are drawn here to keep it readable. Add Cara and Dee from the table and the market curve simply gets flatter still.
Why the curve slopes downwards
The law of demand is not just an observation. Three assumptions explain it, and together they describe how consumers respond to a price change.
The first two explain what a price change does to your spending power and your options. The third explains why you were never going to buy an unlimited amount anyway.
Assumption
What it says
The assumption behind it
The income effect
A change in price changes a consumer’s purchasing power. When a price falls, the same income buys more of the good. When it rises, the same income buys less.
That consumers adjust what they consume in response to changes in purchasing power caused by price movements.
The substitution effect
Consumers replace goods that have become relatively more expensive with ones that are now relatively cheaper. If brand A coffee rises in price, some buyers switch to brand B for similar satisfaction at a lower cost.
That consumers are rational decision-makers with perfect information, who respond to changes in relative prices by adjusting consumption.
Diminishing marginal utility
Each additional unit consumed gives less extra satisfaction than the one before. A hungry person gets a lot from the first burger and much less from the second.
That the only way to persuade someone to keep buying additional units is to lower the price — which is a movement down the demand curve.
Notice how attackable these are. The substitution effect assumes perfect information, which almost nobody has. The income effect assumes people respond smoothly to changes in purchasing power, when habit and brand loyalty often stop them. Naming an assumption and questioning it is the cleanest evaluation move available on this topic.
Worked examples
WORKED EXAMPLE
Three consumers demand a good at $5: Ana 12 units, Bo 7 units, Cai 9 units. At $9 they demand 6, 3 and 4 units. Calculate market demand at each price and comment on the relationship. [3]
Step 1: add horizontally at $512 + 7 + 9 = 28 unitsStep 2: add horizontally at $96 + 3 + 4 = 13 unitsMarket demand: 28 units at $5, 13 units at $9Step 3: comment
Price rose and quantity demanded fell, which is the inverse relationship set out in the law of demand.
Add across each price row. Never add the prices together.
WORKED EXAMPLE
Explain, using the income and substitution effects, why a rise in the price of bus tickets reduces the quantity of tickets demanded. [4]
Substitution effect
Bus travel is now relatively more expensive than cycling, walking or car sharing, so some passengers switch to those alternatives for a similar outcome at a lower cost.
relative price up → switch awayIncome effect
With the same income, each passenger’s purchasing power has fallen, so they can afford fewer journeys than before.
purchasing power down → fewer journeysPut it on the diagram
Both effects reduce the quantity demanded at the higher price. This is a contraction in quantity demanded, shown as a movement up the demand curve, not a shift.
Both effects reduce QD, giving the inverse price relationship
💡 Exam tip
Use the full definition: willing and able, at a given price, in a given time period. All three parts carry marks.
Say contraction and extension, not “demand fell” or “demand rose”, when only price has changed.
Always add ceteris paribus when stating the law of demand.
Label your diagram fully: both axes with units, the curve as D, and every price and quantity you refer to.
Learn all three explanations for the downward slope. A question asking “why” usually wants more than one.
Market demand is horizontal addition. Add quantities at each price level.
⚠️ Common mix-up
Confusing demand with wanting something. Without the ability to pay it is not effective demand.
Saying “demand falls” when the price rises. Quantity demanded falls; demand itself is unchanged.
Adding prices to find market demand. Add the quantities at each price.
Putting quantity on the vertical axis. Price goes on the vertical axis, quantity on the horizontal, always.
Muddling the income effect with a change in income. The income effect comes from a price change altering purchasing power. An actual change in income is a non-price determinant, and it shifts the curve.
Treating the assumptions as facts. Perfect information and fully rational consumers are assumptions, and questioning them earns evaluation marks.
Up next: What Shifts a Demand Curve — the five things that change demand at every price, and the language that separates a shift from a movement.
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