This document provides an overview of key concepts related to demand, including: - The definition of demand as the quantity willing and able to be purchased at a given price. - How the demand curve illustrates the inverse relationship between price and quantity demanded. - Factors that can cause a shift in the demand curve, such as changes in income, prices of substitutes/complements, and non-economic factors. - The concept of utility and how the principle of diminishing marginal utility helps explain the downward slope of the demand curve.

1. Theory
of
Market
Demand
EdExcel
Economics
1.2.2

2. Demand
for
Goods
and
Services
• Defini8on
of
demand:
• Demand
for
a
good
or
service
is
the
quan:ty
that
purchasers
are
willing
and
able
to
buy
at
a
given
price
in
a
given
period
of
:me.
• Effec8ve
demand:
• Only
if
demand
for
a
product
is
backed
up
by
a
willingness
and
ability
to
pay
the
market
price
does
demand
becomes
effec:ve
or
realized
or
actual.
• The
basic
law
of
demand
is
that
demand
varies
inversely
with
price
–
lower
prices
make
products
more
affordable
for
consumers.
Effec:ve
demand
is
backed
up
with
an
ability
to
pay
Poten:al
(latent)
demand
is
not
yet
expressed
in
the
market

3. The
Demand
Curve:
Price
&
Quan8ty
Demanded
Price
of
Coffee
Quan:ty
demanded
of
coffee
Demand
for
Coffee
P1
Q1
P2
Q2
P3
Q3
A
higher
price
leads
to
a
contrac8on
of
quan:ty
demanded
A
lower
price
leads
to
an
expansion
of
quan:ty
demanded
Only
changes
in
market
price
cause
a
movement
along
the
demand
curve

4. Income
and
Subs8tu8on
Effects
of
a
Price
Change
Income
effect
• A
fall
in
price
increases
the
real
purchasing
power
of
consumers
• This
allows
people
to
buy
more
with
a
given
budget
• For
normal
goods,
demand
rises
with
an
increase
in
real
income
Subs:tu:on
effect
• A
fall
in
the
price
of
good
X
makes
it
rela:vely
cheaper
compared
to
subs:tutes
• Some
consumers
will
switch
to
good
X
leading
to
higher
demand
• Much
depends
on
whether
products
are
close
subs:tutes

5. Causes
of
ShiHs
in
the
Demand
Curve
1. Changing
prices
of
a
subs8tute
goods
or
services
in
compe88ve
demand
2. Changing
price
of
a
complements
–
i.e.
products
in
joint
demand
3. Changes
in
the
real
income
of
consumers
– When
real
income
goes
up,
our
ability
to
purchase
goods
and
services
increases,
and
this
causes
an
outward
shiT
in
the
demand
curve.
– But
when
incomes
fall
there
will
be
a
decrease
in
demand,
except
for
inferior
goods
4. Changes
in
the
distribu:on
of
income
-­‐
a
more
equal
distribu:on
of
income
can
increase
total
demand
because
rela:vely
poorer
consumers
spend
a
higher
propor:on
of
their
income
5. The
effects
of
adver8sing
and
marke8ng
6. Interest
rates
and
demand
(e.g.
affec:ng
the
cost
of
credit)
7. Changes
in
the
size
and
age
structure
of
a
popula8on
8. Seasonal
factors
for
some
goods
and
services
9. Social
and
emo8onal
factors

6. The
Concept
of
U8lity
• U:lity
is
a
measure
of
the
sa:sfac:on
that
we
get
from
purchasing
and
consuming
a
good
or
service
• Total
u:lity:
– The
total
sa:sfac:on
from
a
given
level
of
consump:on
• Marginal
u:lity
– The
change
in
sa:sfac:on
from
consuming
an
extra
unit
• Standard
economic
theory
believes
in
the
idea
of
diminishing
returns
i.e.
the
marginal
u:lity
of
extra
units
declines
as
more
is
consumed
U:lity
is
a
measure
of
sa:sfac:on
Does
the
u:lity
we
get
affect
our
willingness
to
pay?

7. Diminishing
Marginal
U8lity
and
Demand
Curve
• Marginal
u:lity
is
the
change
in
total
sa:sfac:on
from
consuming
an
extra
unit
of
a
good
or
service
• Beyond
a
certain
point,
marginal
u:lity
may
start
to
fall
(diminish)
• In
our
example,
this
happens
with
the
4th
unit
where
MU
falls
to
12
• The
8th
unit
carries
zero
marginal
u:lity
i.e.
total
u:lity
stays
the
same
• If
marginal
u:lity
is
falling,
then
consumers
will
only
be
prepared
to
pay
a
lower
price
• This
helps
to
explain
the
downward
sloping
demand
curve
Quan8ty
Consumed
Total
U8lity
(TU)
Marginal
U8lity
(MU)
1
10
10
2
24
14
3
40
16
4
52
12
5
61
9
6
68
7
7
72
4
8
72
0

8. The
Paradox
of
Value
• The
Paradox
of
Value
is
also
known
as
the
diamond-­‐water
paradox
• We
understand
that
water
is
necessary
to
sustain
life
and
that
ornaments
such
as
diamonds
are
just
that
–
certainly
life
sustaining.
• But
water
typically
has
a
low
price,
while
a
piece
of
diamond
jewelry
has
a
a
high
market
price.
• One
reason
–
water
is
abundant
rela:ve
to
demand
whereas
diamonds
are
scarce
rela:ve
to
demand
• Value
in
use
i.e.
drinking
water
to
sa:sfy
your
thirst
• Value
in
exchange
–
what
a
resource
can
be
sold
for
in
exchange
for
other
products.
Nothing
is
more
useful
than
water:
but
it
will
purchase
scarce
any
thing.
The
reverse
is
usually
true
for
expensive
jewelry
Cheap
water
Expensive
jewelry

9. Seasonal
Demand
for
Goods
and
Services
• Seasonality
refers
to
fluctua:ons
in
output
and
sales
related
to
the
seasonal
of
the
year.
• For
most
products
there
will
be
seasonal
peaks
and
troughs
in
produc:on
and/or
sales
• Demand
for
slippers
peaks
in
the
run
up
to
Christmas
• Demand
for
plants
at
garden
centres
is
linked
to
the
plan:ng
season
• There
is
high
demand
for
decora:ng
materials
before
the
Easter
weekend
• High
street
retailers
such
as
jewellry
companies
may
sell
as
much
as
80-­‐90%
of
their
products
over
Xmas
• Theatres
take
a
high
%
of
their
income
during
pantomime
season
Easter
chocolate
Summer
fruits
Winter
clothing
Ski
season
products
Some
examples
of
seasonal
demand

10. Seasonal
and
Non-­‐Seasonal
Demand
for
Confec8onery
5,219
5,243
5,353
5,375
5,136
580
563
583
612
669
0
1000
2000
3000
4000
5000
6000
7000
12
months
ending
2
October
2011
12
months
ending
1
October
2012
12
months
ending
29
September
2013
12
month
ending
29
December
2013
12
month
ending
28
December
2014
Sales
value
in
million
euros
Non-­‐seasonal
confec:onery
Seasonal
confec:onery
Just
over
one
tenth
of
total
spending
on
confec:onery
in
the
UK
is
es:mated
to
be
seasonal
spending
e.g.
at
Easter
and
at
Christmas.

11. Seasonal
Demand:
Occupancy
Rate
of
Hotels
in
USA
The
occupancy
rate
of
hotels
follows
a
season
pajern
reaching
a
peak
during
the
summer
months.
At
off-­‐peak
:mes,
the
occupancy
rate
can
decline
to
less
than
50%
i.e.
there
is
plenty
of
spare
capacity
40.0%
45.0%
50.0%
55.0%
60.0%
65.0%
70.0%
75.0%
80.0%
Jan
Feb
March
April
May
June
July
Aug
Sep
Oct
Nov
Dec
Occupancy
rate
(per
cent)
2011
2012
2013
2014
2015

12. Networks
and
Demand
Choices
Increasingly
in
the
digital
economy,
the
choices
made
by
consumers
are
influenced
by
the
decisions
of
others.
A
good
example
is
the
decision
about
which
messenger
app
to
use.
800
700
549
300
249
211
200
91
48
0
100
200
300
400
500
600
700
800
900
WhatsApp
Facebook
Messenger
WeChat
Skype*
Viber*
LINE
Kik*
BlackBerry
Messenger
KakaoTalk
Monthly
ac:ve
users
in
millions
*
July
2015
data

13. Derived
Demand
• Derived
demand
is
the
demand
for
a
factor
of
produc8on
used
to
produce
another
good
or
service
• Steel:
The
demand
for
steel
is
strongly
linked
to
the
market
demand
for
cars
and
the
construc:on
of
new
buildings.
• Wood:
Wood
is
a
product
where
much
of
the
demand
comes
from
the
uses
to
which
it
can
be
put.
– The
end
use
of
wood
in
the
UK
is:
Construc:on:
60%,
Furniture:
15%,
Packaging:
15%,
Fencing:
7%,
Other:
3%
• Labour:
In
factor
markets,
the
demand
for
labour
is
derived
• Transport:
An
increase
in
the
demand
for
air
travel
will
lead
to
a
rise
in
the
demand
for
airplane
pilots.
The
idea
of
derived
demand
is
important
to
use
when
discussing
inter-­‐
rela:onships
between
markets.
Many
ques:ons
consider
two
or
more
markets.

14. Composite
Demand
• Composite
demand
exists
where
goods
have
more
than
one
use
-­‐
an
increase
in
the
demand
for
one
product
leads
to
a
fall
in
supply
of
the
other
• An
example
is
milk
which
can
be
used
for
cheese,
yoghurts,
cream,
bujer
and
other
products
including
fer:lizer!
• Another
example
is
land
–
e.g.
farmland
can
be
developed
in
many
different
ways,
urban
land
has
different
uses
etc.
• Oil
is
used
in
many
different
industries
such
as
plas:cs.
Bujer
Yoghurt
Milk
Chocolate
Cheese
Unprocessed
milk
has
many
final
uses

15. Illustra8ng
ShiHs
in
the
Demand
Curve
Price
of
Coffee
Quan:ty
demanded
of
coffee
D1
P1
Q1
Q2
D2
D3
Q3
D1
to
D3
is
an
inward
shiH
of
demand
–
less
is
demanded
at
each
market
price
D1
to
D2
is
an
outward
shiH
of
demand
–
more
is
demanded
at
each
market
price
Changes
in
price
do
not
cause
shiTs
in
the
demand
curve
for
a
product

16. Consump8on
of
sports
and
energy
drinks
in
UK
5.7
6.5
8.6
9
10
11.2
11.3
11.8
12.1
0
2
4
6
8
10
12
14
2006
2007
2008
2009
2010
2011
2012
2013
2014
Average
consump:on
in
litres
per
person
Which
demand
factors
might
help
to
explain
the
rising
trend
of
consump:on
and
sports
and
energy
drinks
in
the
UK?

17. Market
Demand:
Global
Sales
of
Wearable
Devices
0
20
40
60
80
100
120
140
160
2013
2014
2015
Shipments
in
millions
Wearable
cameras
Smart
glasses
Smart
watches
Healthcare
Sports/ac:vity
trackers
Wearable
3D
mo:on
trackers
Smart
clothing
Global
market
demand
for
wearable
devices
is
soaring
–
to
what
extent
are
social
factors
more
important
than
factors
such
as
income?

18. The
Fall
and
Rise
of
Vinyl
Album
Sales
in
the
UK
In
2014,
over
1.2
million
vinyl
LPs
were
sold
in
the
UK,
up
from
just
205
thousand
sold
in
2007.
What
might
explain
this
rebound?
0
200000
400000
600000
800000
1000000
1200000
1400000
1600000
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
LPs
sold

19. Changing
Preferences
–
Movie
Consump8on
in
the
UK
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
Q3
2010
Q1
2011
Q3
2011
Q1
2012
Q3
2012
Q1
2013
Q3
2013
Q1
2014
Q3
2014
Q1
2015
Share
of
respondents
Bought
DVD/Blu-­‐ray
Any
digital
Paid
official
digital
(DTO/VOD)
Unofficial
digital
(pirate)
The
pajern
of
demand
for
movies
is
changing!
Digital
sales
now
account
for
20%
of
sales
and
the
share
from
physical
sales
is
falling.

20. Theory
of
Market
Demand
EdExcel
Economics
1.2.2