IB ECONOMICS HL
,Topic 2 - Microeconomics
2.1 - Demand
Demand: the quantity of a good or service that consumers are willing and able to purchase, in
a period of time.
Law of demand
"The law of demand states that the quantity demanded of a product will fall if price rises, and
vice versa, ceteris paribus."
Assumptions underlying the law of demand
1. The income effect: As the price of a product falls, the real income of customers
increases, meaning they are able to buy more products at lower prices, creating more
demand. Real income increases when prices fall.
2. The substitution effect: As the price of a good or service falls, the product will be
more attractive than more expensive rival/substitute products, and customers will
switch over, creating more demand.
3. The law of diminishing marginal utility: As consumption of a good or service
increases, the additional gain of consuming one more diminishes, so customers are
only willing to pay at lower prices.
The demand curve
- Downward sloping demand curve
- Price on y-axis
- Quantity on x-axis
Individual VS market demand
A market is a place where transactions between buyers and sellers take place. The market
demand curve refers to the sum of all individual demand for a product.
,Non-price determinants of demand → shift in the curve
1. Income: Higher levels of income mean consumers can buy more products. This
increases demand even when the price remains the same. This is only the case with
normal goods (goods that consumers tend to buy more of when their income
increases). With inferior goods, consumers will buy less of them when their income
increases.
2. Tastes and preferences: Some products become fashionable/trendy, while others are
uncool, despite possibly being a better option.
3. Future price expectations: If a product is going to be worth more in the future, many
will buy it now, and vice versa.
4. Number of consumers: The more consumers in a market, the more demand
5. Prices of related goods
→ Complementary goods: Goods jointly demanded, such as phones and phone cases, cars
and tires, etc. When the price of one increases, the demand for the other will also go down,
despite not changing its price.
→ Substitute goods: Goods competing against each other for demand, such as iPhones and
Samsungs, Taco Bell and McDonald's, etc. When the price of one increases, the demand for
the other will increase.
, Movements and shifts on the demand curve
Movements along the demand curve are caused only by
changes in pricing.
1. Contraction means lower quantity demanded because
of higher price. Demand goes up-left on the curve.
2. Expansion means higher quantity demanded because of
lower price. Demand goes down-right on the curve.
Shifts in the demand curve are caused by one or multiple
non-price determinants of demand
1. Leftwards shifts are decreases in demand caused by
unfavourable non-price events.
2. Rightwards shifts are increases in demand caused by
favourable non-price events.
,Topic 2 - Microeconomics
2.1 - Demand
Demand: the quantity of a good or service that consumers are willing and able to purchase, in
a period of time.
Law of demand
"The law of demand states that the quantity demanded of a product will fall if price rises, and
vice versa, ceteris paribus."
Assumptions underlying the law of demand
1. The income effect: As the price of a product falls, the real income of customers
increases, meaning they are able to buy more products at lower prices, creating more
demand. Real income increases when prices fall.
2. The substitution effect: As the price of a good or service falls, the product will be
more attractive than more expensive rival/substitute products, and customers will
switch over, creating more demand.
3. The law of diminishing marginal utility: As consumption of a good or service
increases, the additional gain of consuming one more diminishes, so customers are
only willing to pay at lower prices.
The demand curve
- Downward sloping demand curve
- Price on y-axis
- Quantity on x-axis
Individual VS market demand
A market is a place where transactions between buyers and sellers take place. The market
demand curve refers to the sum of all individual demand for a product.
,Non-price determinants of demand → shift in the curve
1. Income: Higher levels of income mean consumers can buy more products. This
increases demand even when the price remains the same. This is only the case with
normal goods (goods that consumers tend to buy more of when their income
increases). With inferior goods, consumers will buy less of them when their income
increases.
2. Tastes and preferences: Some products become fashionable/trendy, while others are
uncool, despite possibly being a better option.
3. Future price expectations: If a product is going to be worth more in the future, many
will buy it now, and vice versa.
4. Number of consumers: The more consumers in a market, the more demand
5. Prices of related goods
→ Complementary goods: Goods jointly demanded, such as phones and phone cases, cars
and tires, etc. When the price of one increases, the demand for the other will also go down,
despite not changing its price.
→ Substitute goods: Goods competing against each other for demand, such as iPhones and
Samsungs, Taco Bell and McDonald's, etc. When the price of one increases, the demand for
the other will increase.
, Movements and shifts on the demand curve
Movements along the demand curve are caused only by
changes in pricing.
1. Contraction means lower quantity demanded because
of higher price. Demand goes up-left on the curve.
2. Expansion means higher quantity demanded because of
lower price. Demand goes down-right on the curve.
Shifts in the demand curve are caused by one or multiple
non-price determinants of demand
1. Leftwards shifts are decreases in demand caused by
unfavourable non-price events.
2. Rightwards shifts are increases in demand caused by
favourable non-price events.
