0455 · 2.2Demand

Defining and measuring demand

0:00Imagine a café reduces the price of its fruit smoothies, and customers order more. Later, smoothies become fashionable, and orders rise even without a price reduction. Both situations involve customers buying more, but economists describe them differently. By the end of this video, you will understand that distinction and show it correctly on a demand diagram. The starting point is that people have limited money and must choose how to spend it.

0:22Wanting something does not necessarily make someone a buyer. A student might want an expensive bicycle but lack the money to purchase it. Economics therefore connects willingness to buy with the ability to pay. Demand is the willingness and ability to buy a good or service at a given price in a given time period. Both parts matter, so economists sometimes call this effective demand. Someone with money who does not want the product contributes nothing to its demand.

0:48Equally, wanting the product without being able to afford it is not enough. The time period also matters because buyers keep purchasing day after day. A café might examine smoothies demanded per day, while a bicycle shop considers bicycles demanded per month. Ten smoothies per day and ten per month represent very different buying patterns. Throughout our café example, we will measure quantities per day. Individual demand refers to one consumer, while market demand combines every buyer of that product.

1:15Suppose our small example market contains just Amira, Ben and Chen. At each price, we add their quantities to find the market total. This table is called a demand schedule because it connects possible prices with quantities buyers would purchase. At four dollars per smoothie, Amira demands one, Ben wants two, and Chen would buy three each day. Adding one plus two plus three gives six smoothies per day. We combine quantities because all three consumers belong to the same market.

1:40Adding prices would not tell us how many smoothies people want to buy. At three dollars, their quantities are two, three and four smoothies per day respectively. Two plus three gives five smoothies per day. Adding four produces market demand of nine smoothies per day. Notice that we compare everyone at the same price before finding the total. When the price falls to two dollars, Amira demands three, Ben wants four, and Chen would buy five smoothies per day.

2:05Three plus four makes seven, and adding Chen’s five gives a market total of twelve smoothies per day. Market demand is therefore the sum of all individual demands at each price.

Demand curves and movements

2:15We can turn the schedule into a demand diagram. Price goes on the vertical axis, and quantity demanded belongs on the horizontal axis. Our points pair four dollars with six smoothies, three dollars with nine, and two dollars with twelve. Joining them gives a downward-sloping demand curve, labelled with the letter D. To read this graph, start at a price on the vertical axis. Move horizontally until you reach the curve, then down to the quantity axis.

2:40At three dollars, the curve shows nine smoothies demanded per day. Each point describes what buyers would purchase at that price, not necessarily what the café actually sells. The downward slope shows an inverse relationship between price and quantity demanded. A lower price makes a product affordable to more people. Existing buyers can also purchase more with the same budget. Some customers switch towards it because it becomes cheaper compared with alternatives.

3:05A higher price works in the opposite direction. Some buyers can no longer afford the product, while others choose an alternative or buy less. However, this comparison assumes other influences remain unchanged. Economists call that assumption other things being equal. It isolates the effect of the product’s own price. A change in the good’s own price causes a movement along a demand curve. In our example, a fall from four dollars to two dollars raises quantity demanded from six to twelve smoothies per day.

3:31Buyers move downwards and rightwards along the existing curve. Cambridge calls this an extension in demand. If the price rises from two dollars to four dollars, quantity demanded falls from twelve to six smoothies per day. The movement is upwards and leftwards along the same curve. This is a contraction in demand. The curve stays fixed because it already shows the quantities associated with those different prices.

Demand shifts and their causes

3:54Now suppose smoothies become more popular while their price stays unchanged. Customers would buy more at the original price, and also at other possible prices. The old curve no longer describes their choices. We need a new curve because something other than the smoothie’s own price has changed. An increase in demand shifts the whole curve to the right. At any given price, buyers are willing and able to purchase a greater quantity.

4:17Our diagram compares the original and new quantities at exactly the same price. Because the price is the same at both points, the larger quantity cannot come from a movement along the old curve. A decrease in demand shifts the curve to the left. Buyers would purchase less at each price than before. For example, smoothies might fall out of fashion even though the café keeps its prices unchanged. The direction of a shift describes the change in quantity at a given price.

4:42Income is one influence that can shift demand. For a normal good, higher income lets consumers afford more at each price, so demand increases and the curve shifts right. A fall in income produces the opposite effect. The phrase normal good matters because not every product responds to income in the same way. Prices of related products also affect buying decisions. Substitutes are products that can be used instead of one another, such as tea and coffee.

5:08If coffee becomes more expensive, some customers switch to tea. Demand for tea increases and its curve shifts right, although its own price has not changed. If coffee becomes cheaper instead, some tea drinkers switch towards it. This reduces demand for tea and shifts its curve left. Always identify which product’s diagram you are drawing. When coffee’s price changes, buyers move along its own curve, while the curve for tea shifts.

5:32Complements are products used together, such as printers and ink cartridges. If printers become more expensive, fewer people buy them. Demand for compatible cartridges then decreases because fewer customers need them, so their curve shifts left. Cheaper printers have the reverse effect and increase demand for cartridges. Tastes and fashion change what people want, while advertising can influence preferences by making a product better known or more attractive. Successful promotion therefore increases demand at an unchanged price.

5:58Growing concern about disposable waste could similarly increase demand for reusable bottles. That shift reflects changing consumer preferences towards environmental sustainability. Population size affects the number of potential buyers in a market. With more people, market demand for many products increases, assuming other influences remain unchanged. Age structure matters too. It describes the proportions of people in different age groups. A larger elderly population could increase demand for products such as hearing aids and home care.

6:27Expectations can change when people choose to purchase. If buyers expect bicycle prices to rise soon, some bring planned purchases forward. Current demand increases because they want to avoid paying more later. When buyers expect a price cut instead, some postpone purchases, so current demand decreases and the curve shifts left. Taxes and subsidies directed at consumers can also alter purchasing power. Higher personal taxes leave households with less disposable income, so demand for normal goods decreases.

6:55A subsidy paid to buyers of reusable bottles increases their ability to purchase them. Demand for the bottles then increases even though the price charged by sellers is unchanged. The key is to identify exactly what has changed. An income tax works through purchasing power, but a sales tax on the product itself raises its own price. That higher price causes a contraction along the product’s demand curve, not a shift.

7:17Do not assume that every mention of a tax automatically describes a demand shift.

Exam technique and common errors

7:22A common mistake is calling a price-driven movement an increase in demand. More is bought, but the original curve already predicted that response to a lower price. Reserve increase and decrease for shifts caused by other influences, and use extension and contraction for movements caused by the good’s own price. Another mistake is treating demand as wanting something, without considering affordability. Students also sometimes add individual quantities taken from different price rows.

7:48That creates a total which does not represent market demand at any single price. Keep the product, price and time period consistent when comparing buyers. In an examination, define means give a precise meaning, so a demand definition needs willingness, ability, price and time period. To state a cause of a shift, express it in clear terms, such as a rise in income. An explain question wants reasons, setting out why or how demand changes.

8:14When asked to analyse, examine in detail the relationships that link each cause to the curve. Consider this exam-style question: explain how a rise in the price of coffee affects demand for tea, assuming they are substitutes. First, identify that the changed price belongs to a different product. Next, connect the relationship between the goods to consumers’ choices. Your answer should finish with the effect on demand for tea. Tea and coffee are substitutes because consumers can use one instead of the other.

8:41A rise in coffee’s price makes tea relatively cheaper. Some consumers switch from coffee to tea. Demand for tea increases at every price, so its curve shifts to the right. For a diagram question, make the economic relationship visible rather than relying on an arrow alone. Label price vertically and quantity demanded horizontally, then identify each demand curve. Show a shift when buyers’ choices change at the same price. For an own-price change, keep one curve and mark the movement between points.

9:10Demand connects willingness to buy with the ability to pay at a specified price and time. Market demand adds all consumers’ quantities at each price. The downward-sloping curve shows that a lower price normally raises quantity demanded, other things being equal. Its points represent different possible choices along one relationship. When the product’s own price changes, show an extension or contraction along that curve. Changes in income, related prices, preferences, population, expectations or consumer purchasing power can shift the whole relationship.

9:39Right means an increase in demand, while left indicates a decrease. Understanding the cause tells you which diagram and terminology to use.