Demand
IB Economics SLΒ· 2.1 DemandΒ· 10 min read
1. Definition and the Law of Demandβ βββββ± 3 min
Effective Demand
Demand that is backed by both the willingness to purchase a good/service and the ability to pay for it at a given price level.
Example:
A consumer who wants a new car but cannot afford it does not count as part of effective demand.
Economists use the assumption of ceteris paribus (all other things equal) when analyzing demand, to isolate the effect of price on quantity demanded.
The Law of Demand states that, ceteris paribus, as the price of a good increases, the quantity demanded by consumers decreases, and vice versa. This creates a downward-sloping demand curve when plotted on a graph with price on the y-axis and quantity on the x-axis. It slopes downward due to two effects:
Substitution effect: When price falls, the good becomes relatively cheaper than substitutes, so consumers switch to it increasing quantity demanded.
Income effect: When price falls, consumers' real income (purchasing power) increases, so they can afford to buy more of the good.
A bakery increases the price of a loaf of bread from $3 to $4, ceteris paribus. How does quantity demanded change according to the law of demand? Explain your answer.
- 1
Step 1: Recall the law of demand: ceteris paribus, price and quantity demanded are inversely related.
- 2
Step 2: In this case, the price of bread increases, with no changes to consumer income, preferences, or the price of other goods.
- 3
Step 3: Therefore, the quantity demanded of bread will decrease.
- 4
Explanation: Higher bread price makes it more expensive relative to substitutes like bagels (substitution effect), and reduces consumers' purchasing power (income effect), both leading to lower quantity demanded.
Exam tip:
Always explicitly mention ceteris paribus when stating the law of demand in exam answers β you will lose a mark if you omit this key assumption.
2. Movements Along vs Shifts of the Demand Curveβ β ββββ± 3 min
Distinguishing between movements along the existing demand curve and shifts of the entire demand curve is one of the most common exam questions for this topic, and the two changes are caused by completely different factors.
Movement along the demand curve
A change in quantity demanded caused only by a change in the own price of the good, ceteris paribus. An increase in quantity demanded is called an extension, a decrease is called a contraction.
A shift of the entire demand curve is caused by a non-price determinant of demand. A shift right means an increase in demand at every price level, while a shift left means a decrease in demand at every price level.
Change Type | Cause | Name of Outcome |
|---|---|---|
Extension (downward movement) | Decrease in own price | Increase in quantity demanded |
Contraction (upward movement) | Increase in own price | Decrease in quantity demanded |
Rightward shift | Favorable non-price change | Increase in demand |
Leftward shift | Unfavorable non-price change | Decrease in demand |
For each change below, state whether it causes a movement along or a shift of the demand curve for avocados: (1) Avocado price falls from $2 to $1 each, (2) A new study finds avocados lower cholesterol, changing consumer preferences.
- 1
Step 1: Remember the rule: only a change in the own price of the good causes a movement along the curve; all other changes cause a shift.
- 2
Step 2: Case 1: The change is a fall in the own price of avocados, so this causes an extension (downward movement along) the existing demand curve.
- 3
Step 3: Case 2: The change is a change in consumer preferences, which is a non-price determinant, so this causes a rightward shift of the entire demand curve.
Exam tip:
Always use the correct terminology: a price change causes a change in quantity demanded, while a non-price change causes a change in demand.
3. Non-Price Determinants of Demandβ β ββββ± 2 min
There are 6 core non-price determinants that will shift the demand curve for a good or service when they change:
Income: Changes to consumers' disposable income affect demand (differently for normal vs inferior goods).
Price of related goods: Changes in price of substitutes (goods used instead of another) or complements (goods used together) change demand.
Consumer preferences: Trends, advertising, or new health information change willingness to purchase a good.
Future price expectations: If consumers expect prices to rise later, they increase current demand.
Population/number of buyers: An increase in population increases overall market demand.
Government policy: Taxes or subsidies change the effective price for consumers and shift demand.
A city bans most short-term Airbnb rentals in residential areas. What is the effect on the demand curve for local hotel stays?
- 1
Step 1: Identify the relationship: Airbnb stays are a substitute for hotel stays. The change here is a non-price determinant for hotels, since Airbnb is less available.
- 2
Step 2: With fewer Airbnb options, more consumers will demand hotel stays at every price level, so demand for hotels increases.
- 3
Step 3: This causes a rightward shift of the entire demand curve for hotel stays, not a movement along the existing curve.
4. Normal vs Inferior Goodsβ β β βββ± 2 min
Normal Good
A good where demand increases when consumer income increases, ceteris paribus. Most goods are normal goods.
Example:
Organic vegetables, restaurant meals, new cars
An inferior good is the opposite: a good where demand decreases when consumer income increases, ceteris paribus. Inferior goods are usually lower-cost alternatives to higher-quality goods, not inherently 'bad quality' by definition.
After a recession, average consumer income in a country falls by 10%. Generic store-brand groceries are an inferior good. What is the effect on the demand curve for generic groceries?
- 1
Step 1: Recall the rule for inferior goods: demand moves in the opposite direction to a change in income.
- 2
Step 2: In this case, average consumer income has fallen.
- 3
Step 3: Since generic groceries are inferior, lower income leads to higher demand at every price level.
- 4
Step 4: Therefore, the entire demand curve for generic groceries shifts rightward.
5. Common Pitfalls
Wrong move:
Calling a price-caused change in quantity demanded a 'shift in demand'
Why:
Only non-price changes cause shifts. Price changes only cause movements along the existing curve.
Correct move:
Refer to price-caused changes as 'change in quantity demanded' (movement along the existing demand curve).
Wrong move:
Forgetting to mention ceteris paribus when stating the law of demand
Why:
IB exam markers explicitly look for this key assumption, and you will lose a mark for omitting it.
Correct move:
Always add 'ceteris paribus' when you state the law of demand in an answer.
Wrong move:
Defining inferior goods as low-quality goods
Why:
Inferior is defined by the relationship between demand and income, not by product quality.
Correct move:
Define inferior goods as goods where demand decreases when consumer income increases.
Wrong move:
Treating current demand changes from future price expectations as a movement along the curve
Why:
Future price expectations are a non-price determinant of current demand, so they shift the curve.
Correct move:
Recognize that changes in future price expectations change current demand, causing a shift of the current demand curve.
6. Quick Reference Cheatsheet
Concept | Cause | Type of Change |
|---|---|---|
Extension of demand | Fall in own price | Downward movement along curve |
Contraction of demand | Rise in own price | Upward movement along curve |
Increase in demand | Favorable non-price change | Right shift of entire curve |
Decrease in demand | Unfavorable non-price change | Left shift of entire curve |
Normal good | Income rises β demand rises | Right shift when income increases |
Inferior good | Income rises β demand falls | Left shift when income increases |
When this came up on past exams
AI-estimated based on syllabus patterns β cross-check with official past papers for accuracy. Use only as revision-focus signals.
- 2022 Β· 1
Shift in demand for coffee
- 2023 Β· 2
Distinguish movement vs shift
- 2021 Β· 1
Demand for inferior good during recession
Going deeper
What's Next
Understanding demand is the foundation of all further microeconomic analysis of markets. Once you master demand, you can combine it with supply to analyze market equilibrium, how the price mechanism works, and the effects of government intervention like price controls, taxes, and subsidies. This concept is also the base for understanding elasticity of demand, which measures how responsive quantity demanded is to changes in price and other factors, and is a common topic for both Paper 1 and Paper 2 exam questions. Demand analysis is also used to evaluate consumer welfare and the impact of market changes on different consumer groups.