IB DP Economics: Demand

This guide follows the IB Diploma Programme Economics guide (first assessment 2022, published February 2020), the course examined from the 2022 session onwards. The content here is sub-topic 2.1, Demand, from Unit 2 Microeconomics. Most of 2.1 is SL and HL. One part is HL only: the assumptions behind the law of demand (the income and substitution effects, and diminishing marginal utility). Those parts are labelled “HL only” below, so SL students can skip them.

Every market, person and figure in the examples is invented and labelled as illustrative. For the next steps, use the revision notes and the practice set. To place 2.1 in the whole course, open the IB DP Economics hub and the printable checklist. When you are ready to test yourself, try the free diagnostics.

What 2.1 asks you to do

Content in the guide	What you must be able to do	Level
Law of demand	Explain the relationship between price and quantity demanded	SL and HL
Assumptions behind the law	Explain the income and substitution effects; explain diminishing marginal utility	HL only
Demand curve	Draw a downward-sloping demand curve	SL and HL
Individual and market demand	Explain how one consumer’s demand relates to market demand	SL and HL
Non-price determinants	Explain income, tastes and preferences, future price expectations, prices of related goods (substitutes and complements), and number of consumers	SL and HL
Movements and shifts	Draw diagrams showing one movement along a curve and one shift of the curve	SL and HL

The guide sets the law of demand and the determinants at the “explain” level of thinking (AO2). Drawing the diagrams is a skill assessed at AO4. The guide recommends 35 hours of teaching and inquiry at SL and 70 at HL for the whole of Unit 2, not for 2.1 alone.

The law of demand

Demand is how much of a good buyers have both the wish and the means to buy, at every price in a range, during a stated period. The law of demand says that, when other things are unchanged, a fall in price raises the quantity demanded and a rise in price reduces it. Price and quantity demanded move in opposite directions.

Two points are easy to miss. First, “willing and able” matters: wanting a laptop you cannot pay for is not demand. Second, the law is about the price of that good only. If incomes or tastes change at the same time, you are no longer comparing like with like.

Assumptions behind the law (HL only)

The law rests on two effects and one idea about satisfaction.

The substitution effect. When the price of a good falls, it becomes cheaper relative to its alternatives. Consumers switch towards it and away from the others.

The income effect. A fall in price also raises the purchasing power of a given money income. Suppose Mira has 60 ostmarks (om) a week for bus travel and the fare falls from 4 om to 3 om.

• Before: 60 ÷ 4 = 15 trips at most.
• After: 60 ÷ 3 = 20 trips at most.
• Her purchasing power in bus trips has risen by (20 − 15) ÷ 15 = 33.3%.

For a normal good, higher real income pushes the quantity demanded up. Both effects work together for most goods. (The guide asks for these two effects, not for more advanced cases, so treat them as the two explanations to know.)

The law of diminishing marginal utility. Utility is satisfaction. Marginal utility means the added satisfaction gained by consuming a further unit. As a person consumes more of a good in a period, the extra satisfaction from each further unit usually falls. A consumer will only buy another unit if the satisfaction it brings, which we can express as the most they would pay, is at least the price.

Worked example (illustrative). Dara values successive pizza slices at lunch at 9, 7, 5, 3 and 1 om. Her marginal utility falls with each slice.

Price (om)	Slices with value at least the price	Quantity demanded
8	9	1
6	9, 7	2
4	9, 7, 5	3
2	9, 7, 5, 3	4

A lower price makes each extra slice worth buying, so more is demanded when the price is lower. That is the law of demand, produced by diminishing marginal utility.

The demand curve

A demand curve plots price up the side and quantity demanded along the bottom. In the guide it is drawn as a downward-sloping line. Label the axes (price, quantity per period), label the curve D, and show the units.

Price
 |\
 | \
 |  \
 |   \  D
 |    \
 +------\-------- Quantity per period

A straight line is a convenient simplification. The key feature is the downward slope, which shows the law of demand.

Individual and market demand

Market demand is the sum of the demands of all consumers in the market at each price. Add the quantities horizontally, price by price. Do not add the prices.

Worked example (illustrative market for reusable flasks in the invented town of Ostmere). Three consumers have these demand schedules, in flasks per month.

Price (om)	Aiko	Bram	Cato	Market
2	6	5	6	17
4	4	4	2	10
6	2	3	0	5
8	0	2	0	2

Check at a price of 4 om: 4 + 4 + 2 = 10. At a price of 6 om, Cato will not buy at all, so only Aiko and Bram count: 2 + 3 = 5.

Notice what happens when a consumer drops out. Cato stops buying somewhere between 4 om and 6 om. Above that price the market curve is made of Aiko and Bram alone, so its slope changes. The market curve can have a kink where a consumer leaves the market, and a new consumer entering the market adds quantity at every price they are willing to pay.

Non-price determinants of demand

The guide lists five. Each one changes demand at every price, so each one shifts the whole curve.

• Income. For a normal good, higher income increases demand and the curve shifts right. For an inferior good (one people buy less of as their income rises because they switch to better alternatives), higher income reduces demand and the curve shifts left.
• Tastes and preferences. A change in fashion, habit or awareness moves demand in the same direction as the change in liking.
• Future price expectations. If consumers expect the price to rise next month, they buy more now, so current demand shifts right. If they expect it to fall, they wait, and current demand shifts left.
• Prices of related goods. Substitutes can replace each other: if a substitute becomes dearer, buyers move towards this good and its demand curve moves right. Complements are consumed together: if one becomes dearer, buyers want less of the other, and its curve moves left.
• Number of consumers. More buyers in the market shift market demand right. Fewer shift it left.

Movements along and shifts of the demand curve

This is the distinction examiners expect you to draw correctly in diagrams.

• A movement along the curve has one cause: the good’s own price changes. Economists call it an extension if the price falls and a contraction if the price rises.
• A shift of the curve is caused by a change in any non-price determinant. Demand has increased (right) or decreased (left).

Worked example (illustrative market for flasks, in thousands per month). Suppose market demand is Qd = 70 − 5P, with P in om.

1. At P = 6, Qd = 70 − 30 = 40.
2. The price falls to 5. Qd = 70 − 25 = 45. This is a movement along D, an extension of demand by 5.
3. Now a health campaign changes tastes, and demand becomes Qd = 85 − 5P. At P = 6, Qd = 85 − 30 = 55.
4. The quantity bought at the same price has risen by 15, from 40 to 55. This is a shift right of the whole curve, an increase in demand.

The diagram description: price runs up the vertical axis and quantity along the horizontal. D1 slopes down through (quantity 40, price 6). D2 lies to the right and parallel, through (quantity 55, price 6). A movement is a slide along one line. A shift is a jump to another line.

Another check. If the number of consumers rises by 10% so that every price attracts 10% more quantity, the quantity at P = 6 becomes 40 × 1.10 = 44. If incomes rise and a normal good attracts 20% more at each price, quantity at P = 6 becomes 40 × 1.20 = 48.

Common errors

• Writing “demand falls” when only the price rose. A price rise causes a contraction, which is a movement, not a fall in demand.
• Shifting the curve to show a price change. Price changes never shift the curve for that good.
• Adding prices when finding market demand. Add quantities at each price.
• Forgetting to label axes and curves, or to mark the new curve D2 and the new quantity.
• Listing the five determinants without saying the direction of the shift and why.
• Believing that a dearer complement lifts demand for the other good. It lowers it.
• Describing the substitution and income effects (HL only) as the same thing. The first is about relative prices, the second about purchasing power.

Using the command terms

The guide defines “draw” as a labelled, accurate diagram. It defines “explain” as a detailed account with reasons or causes, and “distinguish” as making the differences clear. A question that says “explain” wants a cause-and-effect chain, not just a label. A question that says “draw” will not give credit for a diagram without labels. Written papers in the guide include an extended-response paper and a data-response paper that contains some quantitative questions, so be ready to calculate with simple demand schedules and equations as well as to draw.

Next steps

Compress this into the revision notes, then try the practice set. For the wider unit, see the demand, supply and equilibrium guide and the exam preparation page.

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.