What is demand?
Definition: The quantity of a good or service that consumers are willing and able to buy at a given price, in a given time period, ceteris paribus.
Explanation: Demand combines both the desire to purchase and the financial ability to do so. It is always linked to a specific price and time frame.
Examples: A student may want a car, but if they cannot afford it, that is not counted as demand.
Exam tip: Always include “willing and able” in definitions — leaving one out loses marks.
What is the law of demand?
Definition: As the price of a good falls, the quantity demanded increases (and vice versa), ceteris paribus.
Explanation:
Substitution effect: Consumers switch to cheaper alternatives when prices fall.
Income effect: Lower prices increase consumers’ real income, allowing them to buy more.
Example: If the price of coffee falls, people may buy more coffee instead of tea.
Exam tip: Always state “ceteris paribus” (all else equal). Diagrams usually show a downward-sloping demand curve.
What is the difference between individual and market demand?
Individual demand: The demand of a single consumer for a good/service at various prices.
Market demand: The total demand for a good, calculated by horizontally summing individual demand curves.
Example: If one consumer demands 2 pizzas at £5 and 100 people have the same demand, total market demand = 200 pizzas.
Exam tip: Market demand curves are always flatter than individual ones because they aggregate more consumers.
What are joint, competitive, and composite demand?
Joint demand (complements): Goods demanded together. Example: cars and petrol. If car demand rises, petrol demand also rises.
Competitive demand (substitutes): Goods that replace each other. Example: Pepsi and Coke. A rise in the price of Pepsi increases demand for Coke.
Composite demand: A good that has multiple uses. Example: milk used for cheese, butter, or drinking.
Exam tip: Exam questions often test your ability to link markets together. Always state how a change in one market affects another.
What is derived demand?
Definition: Demand for a good/service that arises because it is used in producing another good/service.
Explanation: The demand is “derived” from demand for the final product.
Examples:
Demand for steel is derived from demand for cars.
Demand for labour is derived from demand for goods produced by workers.
Exam tip: Link derived demand to factors of production in answers.
What are movements along the demand curve?
Definition: Changes in quantity demanded caused only by price changes of the good itself.
Extension of demand: Fall in price → rise in quantity demanded → movement down the curve.
Contraction of demand: Rise in price → fall in quantity demanded → movement up the curve.
Example: If chocolate bars fall from £1.20 to £1, demand rises from 200 to 250 units.
Exam tip: Movements are always labelled extension (down) and contraction (up). Do not confuse with shifts.
What are shifts of the demand curve?
Definition: A change in demand due to non-price factors, which shifts the entire curve left or right.
Causes:
Income changes (normal vs inferior goods).
Population growth or demographics.
Tastes, fashion, or advertising.
Prices of substitutes or complements.
Expectations of future price changes.
Interest rates or credit availability.
Example: A rise in population increases demand for housing, shifting the demand curve right.
Exam tip: Classic exam trap → “Price change = movement, non-price factor = shift.”
What are normal goods?
Definition: Goods for which demand rises as consumer income rises, and falls as income falls, ceteris paribus.
Explanation: These goods are desirable when consumers have more purchasing power, and are bought in larger quantities as incomes grow.
YED: Positive (>0).
Examples: Branded clothes, smartphones, holidays.
Exam tip: Normal goods can be necessities (low YED) or luxuries (high YED). Always contrast with inferior goods.
What are inferior goods?
Definition: Goods for which demand falls as income rises, and rises as income falls, ceteris paribus.
Explanation: Consumers switch away from these when they can afford higher-quality substitutes.
YED: Negative (<0).
Examples: Instant noodles, bus travel, second-hand clothing.
Exam tip: Don’t confuse inferior with “bad quality” — they simply lose demand as income increases.
What are Giffen goods?
A type of inferior good for which demand rises as price rises, apparently violating the law of demand.
Explanation:
Usually essential staples for low-income households.
Price rise reduces real income → households cannot afford better alternatives → they buy more of the staple despite the higher price.
Examples: Bread in 19th-century Britain, rice in subsistence economies.
Evaluation: Extremely rare in modern economies, mostly a theoretical concept.
Exam tip: Always explain that the income effect outweighs the substitution effect.
What are Veblen goods?
Definition: Luxury goods where demand rises as price rises, because higher prices make them more desirable as status symbols.
Explanation: Consumers view higher price as a sign of exclusivity, prestige, or quality.
Examples: Designer handbags, luxury cars, Rolex watches.
Exam tip: Contrast with Giffen goods → Veblen = luxury/status, Giffen = necessity/income effect.
What is the difference between complementary and substitute goods?
Complementary goods:
Definition: Goods that are used together, so demand for one is linked to demand for the other.
Explanation: If the price of one rises, the demand for its complement falls.
Examples: Cars & petrol, printers & ink, smartphones & apps.
Elasticity link: Cross elasticity of demand (XED) is negative.
Substitute goods:
Definition: Goods that replace each other in consumption.
Explanation: If the price of one rises, consumers switch to the substitute, so demand for it rises.
Examples: Pepsi & Coke, bus travel & train travel, iPhone & Samsung.
Elasticity link: XED is positive.
Exam tip: Complements = “go together.” Substitutes = “instead of.” Use XED values in evaluation for strong analysis.
What is income elasticity of demand (YED)?
Definition: Responsiveness of demand to a change in consumer income, ceteris paribus.
🔢 Formula: YED = % change in quantity demanded / % change in income
📊 Values:
YED > 0 → Normal goods
YED < 0 → Inferior goods
0 < YED < 1 → Necessities
YED > 1 → Luxuries
📝 Examples:
Holidays → luxury (YED > 1)
Bread → necessity (YED 0–1)
Bus travel → inferior (YED < 0)
🎯 Exam tip: Always classify goods with YED in evaluation (e.g. effects of growth vs recession).
What is cross elasticity of demand (XED)?
📖 Definition: Responsiveness of demand for one good to a change in the price of another good, ceteris paribus.
🔢 Formula: XED = % change in quantity demanded of Good A / % change in price of Good B
📊 Values:
XED > 0 → Substitutes
XED < 0 → Complements
XED = 0 → Unrelated goods
📝 Examples: Pepsi & Coke (positive XED = substitutes), cars & petrol (negative XED = complements).
🎯 Exam tip: Always state sign (+/–) and magnitude (size of XED shows strength of relationship).
What key evaluation points should you remember about demand?
Distinguish between movements vs shifts clearly.
Always mention ceteris paribus when explaining the law of demand.
Use normal vs inferior goods to explain income effects.
Show awareness of exceptions (Giffen and Veblen goods).
Evaluation: Demand theory assumes rational consumers, but real-world behaviour may be influenced by advertising, habits, social norms, or behavioural biases.
