The Law of Demand and the Demand Curve

Demand is the quantity of a good or service that consumers are willing and able to purchase, in a period of time.

Law of Demand (AO2)

"The law of demand states that the quantity demanded of a product will fall if price rises, and vice versa, ceteris paribus."

(HL) Assumptions Underlying the Law of Demand (AO2)

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. 

   • Think of eating chocolate bars. As you eat more and more, the added joy of eating chocolate decreases, and you wouldn't consume more without prices decreasing.

All this makes this diagram:

The Demand Curve (AO4)

Individual vs. Market Demand (AO2)

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. 

Example: A supermarket sells 300 beer bottles to adults and 150 to kids a day. The market demand is therefore 450 beer bottles.