Explain the law of demand, the demand curve, the difference between a movement along and a shift of the curve, and the non-price factors that determine demand.

What this dot point is asking

Demand is one half of the market mechanism, and CCEA expects you to handle it precisely. You must know the law of demand and why the demand curve slopes downwards, draw and read the curve, and, above all, separate a movement along the curve (caused by the good's own price) from a shift of the whole curve (caused by a non-price factor). You then need the list of non-price determinants of demand and how each one shifts the curve left or right. This is Section 1 material and is the foundation for price determination and elasticity.

The law of demand and the demand curve

Demand in economics means effective demand: the quantity of a good that consumers are both willing and able to buy at a given price in a given period. Wanting a Ferrari without the money to pay for it is not demand.

The law of demand states that, other things being equal, as the price of a good rises the quantity demanded falls, and as the price falls the quantity demanded rises. Plotting price on the vertical axis against quantity on the horizontal axis gives a demand curve that slopes downwards from left to right.

Two reasons explain the downward slope. First, when a good gets cheaper, consumers can afford more of it (the income effect). Second, when a good gets cheaper relative to similar goods, people switch towards it (the substitution effect). Both push quantity demanded up as price falls.

Movement along the curve versus a shift of the curve

This distinction is examined almost every year, so it must be exact.

A movement along the demand curve happens only when the price of the good itself changes. A price fall causes an extension of demand (a move down the curve to a larger quantity); a price rise causes a contraction of demand (a move up the curve to a smaller quantity). The curve itself does not move.

A shift of the whole curve happens when a non-price factor changes. The entire curve moves to a new position: to the right if more is now demanded at every price (an increase in demand), or to the left if less is demanded at every price (a decrease in demand).

The non-price determinants of demand

A shift of the demand curve is caused by one of the following non-price factors. CCEA expects you to know them and the direction each shifts the curve.

• Income. For a normal good, higher income increases demand (shift right). For an inferior good, such as a supermarket value range, higher income reduces demand (shift left) as people trade up.
• Tastes and fashion. If a good becomes more fashionable or popular, demand rises (shift right); if it falls out of favour, demand falls (shift left).
• Price of substitutes. A substitute meets the same need (tea and coffee). If the price of a substitute rises, demand for this good rises (shift right) as buyers switch in.
• Price of complements. Complements are used together (cars and petrol, consoles and games). If the price of a complement rises, demand for this good falls (shift left).
• Population and demographics. A larger population, or a change in its age structure, can raise or lower demand for particular goods.
• Advertising. Successful advertising raises demand (shift right).

Why this matters

Demand only makes sense alongside supply, and the two together determine price. If you cannot tell a shift from a movement, you cannot explain how an event changes the market price in the next topic, where a shift in demand or supply moves the equilibrium. Elasticity then measures how strong the price response is. Demand also drives later analysis of competition, advertising and government policy, so a secure grasp here pays off across the whole specification.