IB DP Economics: Demand – Revision Notes

These notes follow the IB Diploma Programme Economics guide (first assessment 2022, published February 2020), the course examined from the 2022 session onwards. The topic is sub-topic 2.1 Demand, at SL and HL. The assumptions behind the law of demand are HL only. The study guide gives the reasoning behind each point. Test yourself with the practice set. For the full course see the IB DP Economics hub and checklist. To find weak spots, use the free diagnostics. All examples use invented markets and figures.

Definitions to know

Term	Meaning
Demand	The amounts buyers wish and can afford to purchase at each price over a period
Law of demand	Other things unchanged, a higher price means a lower quantity demanded
Demand curve	Line or curve of price against quantity demanded, sloping down
Market demand	Sum of all consumers’ quantities at each price
Extension / contraction	Slide down / up the curve after a fall / rise in the good’s own price
Increase / decrease in demand	Curve moves right / left because of any non-price determinant
Normal good	Demand rises when income rises
Inferior good	Demand falls when income rises
Substitutes	Goods that can replace each other
Complements	Goods used together

The law and its explanation

The law says price and quantity demanded move in opposite directions. On a diagram, the curve slopes downward. Always put price up the side, quantity along the bottom, and name the curve D.

HL only: why the law holds

• Substitution effect: a lower price makes the good cheaper relative to alternatives, so buyers switch towards it.
• Income effect: a lower price raises purchasing power, so a normal good is bought in larger quantity.
• Diminishing marginal utility: each extra unit gives less satisfaction, so buyers take more only if the price falls.

Quick numbers. A budget of 60 om on a fare that falls from 4 to 3 om: trips possible rise from 15 to 20, an increase in purchasing power of 33.3%. Slice values 9, 7, 5, 3, 1 om: at a price of 4 om, three slices are worth buying (9, 7, 5). At 2 om, four are (9, 7, 5, 3).

Method: finding market demand

1. List the price points.
2. At each price, read off each consumer’s quantity. A consumer with no demand at that price contributes zero.
3. Add the quantities across consumers (horizontal sum).
4. Plot or state market quantity against price.

Reminder: in an illustrative market with Aiko, Bram and Cato, the quantities at a price of 4 om are 4, 4 and 2, which give 10. At 6 om, Cato drops out, and Aiko and Bram give 2 + 3 = 5. When a consumer drops out as price rises, the market curve changes slope at that price.

Non-price determinants: direction of shift

Determinant	Change	Effect on demand
Income (normal good)	Rises	Shift right
Income (inferior good)	Rises	Shift left
Tastes and preferences	Move in favour	Shift right
Expected future price	Expected to rise	Current demand shifts right
Expected future price	Expected to fall	Current demand shifts left
Price of a substitute	Rises	Shift right
Price of a complement	Rises	Shift left
Number of consumers	Rises	Shift right

Each row says what to write: the cause, the direction, and a reason.

Movements versus shifts

Price
 |
 |  \    \
 |   \    \
 |    a    \
 |     \    b
 |      \    \
 |  D1   \  D2
 +-------------------- Quantity

Point a to a lower point on D1 is a movement. Moving from D1 to D2 at the same price is a shift.

• Own price changes: slide along the same curve (from a to another point on D1).
• Any other determinant changes: draw a new curve (D2) and label the new quantity at the original price.

Worked reminder (illustrative flask market, Qd = 70 − 5P). At P = 6, Qd = 40. If P falls to 5, Qd = 45: an extension of 5. If tastes shift so that Qd = 85 − 5P, then at P = 6, Qd = 55: demand has increased by 15 at the same price. If 10% more consumers join, quantity at P = 6 is 40 × 1.10 = 44. If a normal good gains a 20% rise in demand at each price from higher incomes, quantity at P = 6 is 40 × 1.20 = 48.

Must-know distinctions

• Extension versus increase. An extension needs a price fall. An increase needs a non-price cause.
• Substitute versus complement. Substitute price up: demand up. Complement price up: demand down.
• Normal versus inferior. The sign of the income effect on demand differs.
• Current demand versus future price. Expecting a higher future price raises demand now.
• Individual versus market. Add quantities, not prices.
• Substitution versus income effect (HL only). Relative price versus purchasing power.

A model diagram answer

Question type: “Using a demand diagram, explain the effect of a rise in household incomes on the market for a normal good.”

1. Draw price (vertical) and quantity (horizontal). Draw D1 sloping down.
2. State that income is a non-price determinant and the good is normal.
3. Draw D2 to the right of D1. Label it.
4. Pick one price and show that D2 gives a larger quantity than D1 at that price.
5. Write one sentence of reasoning: higher incomes raise the ability to pay at every price.

For an inferior good, steps 3 to 5 reverse: D2 sits to the left, because richer buyers trade up to goods they prefer.

Command terms and papers

The guide’s glossary defines the terms you will meet on this topic.

Command term	What it asks for
State	A brief answer with no explanation
Define	The precise meaning of a term
Distinguish	Make the differences clear
Explain	A detailed account with reasons or causes
Draw	A labelled, accurate diagram
Calculate	A numerical answer with the working shown

Paper 1 is an extended-response paper of 1 hour 15 minutes and 25 marks, where you answer one question from three. Paper 2 is a data-response paper of 1 hour 45 minutes and 40 marks, where you answer one question from two, and it includes some quantitative questions. At HL there is also Paper 3, a policy paper of 1 hour 45 minutes and 60 marks. HL-only demand content can be examined anywhere HL material is included.

Quick self-test

1. State the law of demand.
2. A traveller has a budget of 60 om and the fare per trip falls from 4 om to 3 om. How many more trips are possible, and what is the percentage rise in purchasing power? (HL only)
3. Dara’s slice values are 9, 7, 5, 3 and 1 om. How many slices will she buy at a price of 6 om? (HL only)
4. At a price of 2 om, three consumers buy 6, 5 and 6 flasks. State the market quantity.
5. Demand is Qd = 70 − 5P. Find Qd at P = 6 and at P = 4.
6. Demand shifts to Qd = 85 − 5P. Find Qd at P = 6, and say whether this is a movement or a shift.
7. A rise in the price of tea shifts the demand curve for biscuits left. Are the two goods substitutes or complements?
8. Shoppers are told a price rise is coming next week. What happens to demand this week?
9. Name the five non-price determinants listed in the guide.
10. Why is a price fall not a shift of the demand curve?

Answers

1. When other things are unchanged, a lower price raises the quantity demanded (and a higher price lowers it).
2. 60 ÷ 4 = 15 trips and 60 ÷ 3 = 20 trips. That is 5 more trips, a rise of 33.3%.
3. Values of at least 6 om: 9 and 7. She buys 2 slices.
4. 6 + 5 + 6 = 17 flasks.
5. At P = 6: 70 − 30 = 40. At P = 4: 70 − 20 = 50.
6. 85 − 30 = 55. It is a shift (the same price gives a different quantity).
7. Complements: a rise in the price of tea reduces the demand for biscuits that are bought with it.
8. It shifts right now, because buyers bring purchases forward.
9. Income; tastes and preferences; future price expectations; prices of related goods; number of consumers.
10. The own price is already on the vertical axis, so its change is shown by moving along the curve.

Where marks are usually lost

• Drawing a diagram without labelling both axes, the curve names or the new quantity.
• Saying “demand rises” when the cause is a fall in own price.
• Explaining a shift with no reason for its direction, such as “income rises so the curve moves” with no mention of normal or inferior.
• Adding prices rather than quantities when building market demand.
• Treating a complement like a substitute, or the reverse.
• Ignoring the “willing and able” part of the definition of demand.
• Mixing up the income effect and the substitution effect in HL answers.
• Not showing working in a calculation that asks for it. The guide defines “calculate” as obtaining a numerical answer showing the relevant stages in the working.
• Giving only a definition when the command term is “explain”, which needs causes or reasons.

Official syllabus

IB Diploma Programme Economics guide, first assessment 2022, published by the International Baccalaureate Organization (February 2020). Sub-topic 2.1 Demand, including its HL-only content.