Starter Activity: Demand decision

If the price of foreign package holidays falls - what

would you expect to happen to the demand for
them?

If a cinema cuts prices for afternoon admissions for

retired people, what should be the impact on ticket
sales?

If a bus company cuts fares will motorists leave their

cars and decide to use public transport?

If the Government raises the tax on each litre of

unleaded petrol how would you predict motorists
would react?

A-LEVEL ECONOMICS

PRICE DETERMINATION IN A COMPETITIVE MARKET

THE DETERMINANTS OF THE DEMAND FOR GOODS & SERVICES

01 DEC 2015

A-LEVEL ECONOMICS

Lesson Objective
Understand the factors which determine the demand
for a good or service
Be able to draw and demand curve to show the
relationship between price and quantity demanded
Be able to explain the causes of shifts in the demand
curve

A-LEVEL ECONOMICS

Keywords

Demand
Quantity Demanded
Substitute goods
Complementary goods

A-LEVEL ECONOMICS

Introduction

The model of supply and demand

attempts to simplify how real markets
(such as housing, the NHS and
commodities markets) operate in the
economy

You will need to be able to apply the

model to help to explain how these
markets work

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What is DEMAND?

Demand is defined as.

the quantity of a good or service
consumers are willing and able to buy
at a given price in a given time period.

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Terms to know
EFFECTIVE DEMAND

Only when the consumers' desire to buy

something is backed up by a willingness and an
ability to pay (ie purchasing power) for it do we
speak of demand. To emphasize this point
economists use the term effective demand.
LATENT DEMAND

Latent demand exists when there is a willingness

to purchase a good or service, but where the
consumer lacks the real purchasing power to
be able to afford the product.

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Links with rationality

Economists assume that in deciding what or how

much to buy, consumers will tend to act rationally in
their own self-interest.

This means that they will choose between different

goods and services so as to maximize total
satisfaction (aka utility)

Clearly they will take into consideration:

How much satisfaction (utility) they get from buying

and consuming an extra unit of a good or service

The market price that they have to pay to make this

purchase
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The law of demand

The law of demand is that there is an inverse

relationship between the price of a good and the
demand for a good.

Therefore.

As prices fall we see an increase in demand

If prices rise we expect to see a decrease in demand

So think.

If the price goes up

A-LEVEL ECONOMICS

demand goes downs

The demand curve

A demand curve shows the relationship between

the price of an item and the quantity demanded
for that item demanded over a certain period of
time.

For normal goods, more will be demanded as the

price falls.

As a result the curve will be downward sloping

left to right

A-LEVEL ECONOMICS

The demand curve

Using a simple line graph, extending both the Y

(showing price) and X (showing quantity
demanded) axis out to 10 and 10 units
respectively, plot the following:

Assume the demand curve is linear, i.e. a straight

line

Copy and complete the table to show the

quantity demanded at all price levels

A-LEVEL ECONOMICS

Price

Quantity
(Demanded)

The demand curve

Its very important that you
understand that
movement along the
demand curve are caused
only by changes in the
price of that particular
good or service

So, at a price of
5, 5 units will be
demanded

A-LEVEL ECONOMICS

If the selling price rises

to 7, there is a
decrease in the quantity
demanded to 3 units

If the selling price falls

to 3, there is an
increase in the
quantity demanded to
7 units

The demand curve

At lower prices consumers can afford to purchase

more with their income they have greater
purchasing power

A fall in price will mean that a consumer will

derive more satisfaction from consuming the
product this will encourage them to buy it

Be careful.

The demand curve is shown as linear here but in

the real world it would not be
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Recap
1.

What is demand?

2.

What is the difference between Effective and

Latent demand?

3.

What does the law of demand state?

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Shifts in the demand curve

A shift in the demand curve indicates

that one or more factors which
determine demand (other than the
price of the product or service) have
changed
When these factors change the whole
demand curve moves (either left of
right)

A-LEVEL ECONOMICS

Price

Quantity

An increase in demand (i.e. a rightward shift in the

demand curve)

An increase in demand means that

more is demanded for that product or
service at each and every price

Price
D2
D1

At the price P1 for

example the
quantity demanded
has increased from
Q1 to Q2

P1
D2

D1
Q1

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Q2

Quantity

A decrease in demand (i.e. a leftward shift in the

demand curve)

A decrease in demand means that

less is demanded for that product or
service at each and every price
At the price P for
example the
quantity demanded
has decreased from
Q1 to Q2

Price
D1
D2
P1
D1

D2
Q2

A-LEVEL ECONOMICS

Q1

Quantity

Causes of shifts in the demand curve

Shifts in the demand curve for products

or services are caused mainly by

Price
D1
D2

Changes in

Population
Advertising
Substitute products
Income (Disposable)
Fashion and Taste
Income tax
Complementary products

A-LEVEL ECONOMICS

P1
D1

D2
Q2

Q1

Quantity

Causes of shifts in the demand curve

Complete the Shifts in the Demand

Curve exercises sheet

Make sure your diagrams are neat,

labelled and accurate

Explain your answers in full sentences

using the correct economic
terminology

A-LEVEL ECONOMICS

Price

Quantity