1.2.2 Demand (Edexcel)

This study note for Edexcel covers the theory of demand.

A) Distinction Between Movements Along and Shifts of a Demand Curve

1. Movements Along a Demand Curve

• Movements along a demand curve occur when the quantity demanded changes due to a change in the price of the good or service, while other factors remain constant.
• The law of demand states that, all else being equal, as the price of a good or service decreases, the quantity demanded increases, and vice versa.

2. Shifts of a Demand Curve

• Shifts of a demand curve occur when factors other than price cause a change in the quantity demanded at every price level.
• A shift indicates a change in overall demand, not just a response to price changes.

B) Factors That May Cause a Shift in the Demand Curve (Conditions of Demand)

1. Income

• As consumer income changes, the demand for goods and services can shift.
• Normal goods: Demand increases with rising income (e.g., luxury cars).
• Inferior goods: Demand increases with falling income (e.g., generic brands).

2. Consumer Preferences

• Changes in consumer preferences can lead to shifts in demand.
• Example: An increased awareness of health leads to a shift towards healthier food choices, increasing the demand for organic produce.

3. Prices of Related Goods

• Complementary goods: A decrease in the price of one good increases the demand for its complementary good (e.g., peanut butter and jelly).
• Substitute goods: An increase in the price of one good increases the demand for its substitute (e.g., Coke and Pepsi).

4. Tastes and Preferences

• Trends and fads can influence demand, as can changes in cultural or social factors.
• Example: The demand for gluten-free products surged with increased health consciousness.

5. Population and Demographics

• Changes in the population size or age demographics can affect demand.
• Example: An aging population may increase the demand for healthcare services and retirement-related products.

6. Expectations

• Future expectations about prices, income, or other factors can affect current demand.
• Example: If consumers expect a future shortage of a product, they may increase their current demand.

C) Diminishing Marginal Utility and Its Influence on the Shape of the Demand Curve

1. Diminishing Marginal Utility (DMU)

• DMU states that as a consumer consumes more units of a good or service, the additional satisfaction (utility) derived from each additional unit decreases.
• This reflects the idea that people value the first unit the most and subsequent units less.

2. Influence on the Demand Curve

• The law of diminishing marginal utility contributes to the downward-sloping shape of the demand curve.
• As price decreases, consumers are willing to buy more because the marginal utility of each additional unit exceeds the price.
• Example: If a consumer enjoys ice cream, the first scoop provides high utility, but by the fifth scoop, the satisfaction gained from each additional scoop decreases.

Understanding these concepts of movements along and shifts of a demand curve, factors affecting demand, and the role of diminishing marginal utility is essential for analyzing market behavior and making predictions about changes in demand for various goods and services in the real world.