The demand curve, the law of demand and diminishing marginal utility, the conditions of demand and the causes of shifts in demand, and the distinction between movements along and shifts of the curve.

What this dot point is asking

AQA wants you to draw and interpret the demand curve, explain the law of demand using diminishing marginal utility, list the conditions of demand that shift the curve, and distinguish a movement along the curve from a shift of the curve. This is core 4.1.3 material that feeds directly into price determination and elasticity.

The demand curve and the law of demand

The demand curve therefore slopes downwards from left to right. There are three reasons. First, diminishing marginal utility: the satisfaction (utility) gained from each extra unit consumed falls, so consumers will buy more only if the price is lower. Second, the income effect: a price fall raises real income (purchasing power), so consumers can afford more. Third, the substitution effect: a price fall makes the good cheaper relative to substitutes, so buyers switch towards it.

The link from utility to price is precise. A rational consumer keeps buying extra units up to the point where marginal utility equals price, $MU = P$. Because marginal utility falls as quantity rises, a lower price is needed to justify each additional unit, which is why quantity demanded rises only when price falls.

The conditions of demand

The non-price factors that shift the demand curve include:

• Income (more income raises demand for normal goods, lowers it for inferior goods).
• Prices of related goods (substitutes and complements).
• Tastes and preferences (fashion, advertising, health information).
• Population (size and age structure).
• Expectations of future prices and incomes.
• Interest rates (affecting demand for goods bought on credit, such as cars and houses).

For example, a fall in the price of a complement such as printer ink raises demand for printers, shifting that demand curve to the right. A rise in the price of a substitute such as tea raises demand for coffee. A fall in interest rates raises demand for credit-financed goods.

Marginal utility and the equi-marginal principle

When a consumer spends on several goods, utility is maximised when the marginal utility per pound spent is equal across all goods, $\frac{MU_a}{P_a} = \frac{MU_b}{P_b}$. If one good gives more utility per pound, the consumer reallocates spending towards it until the ratios equalise. This underpins the downward-sloping curve at the level of the whole budget.