IB Economics: Demand Demand and Supply Outline the meaning of the term Market Hi People. According to the IB syllabus, the term market is deﬁned aswhere buyers and sellers meet and agree on a price. Explain the negative causal relationship between price and quantitydemanded. This is a very straightforward concept. If I buy two hundred chickensfrom the market, it will cost X dollars. However, if the price of chickensincreases dollars, the the quantity demanded will be lower. Is this not asimple concept? Why would you buy more chickens when they costmore? The main deﬁnition for demand is: The willingness and ability toconsume a good or service in a given amount of time. So basically the chicken example is the law of demandin economics and this can berepresented by a simple graph. Thisgraph would also be known as themarket demand for good X. Of course, price represents the moneyyou would pay for the good/service,and the quantity represents themarket demand. Hopefully it’s clear tomost people that the point where the axes cross is $0 and 0 demand. As you go along the price axis and drawa line from there straight to the demand curve, you can see that the
quantity demanded decreases. Note that this is true all the time ONLY ifeverything else remains constant. Another way to describe this is‘ceteris paribus’. This is an extremely important word to use, as thisword is basically applicable to almost every single question ineconomics, especially evaluation ones. HL ONLY - Well forget what I said when I said ‘all the time’. Actuallythere are two exceptions that the IB syllabus needs you to know. Giffen Goods – Basically goods that are SO CHEAP, that the value ofthese goods are viewed as extremely low. As the price of these goodsfall, you will demand less of these goods, as when the price of thesegoods fall, you have more to spend on better things, ceteris paribus.Therefore the demand curve is upward sloping. An example to explain this better (Well believe me I did not understandthis at ﬁrst until I saw an example): A consumer has $5 to spend.Normally he would buy 3 bags of potatoes at $1.20 each and 1 pack ofsausages at $1.40 a pack. The consumer prefers meat though. So whenthe price of one bag of potatoes falls to $1.08, the consumer now buys2 packs of sausages. Spending $4.96, he bought 2 bags of potatoes,this means that the potatoes, the Giffen Good, falls in demand. Veblen Goods – These types of goods are of a nature that is totallyreversed. These goods are so epic, that demand for them is also knownas ostentatious consumption. When these types of goods increase inprice, purchasing it appears a lot more appealing. Basically buyingthese goods is showing off; when the price increases, it’s even better toown such a highly valued good. An example is basically gold-platedPSPs, diamond-covered wallets, massive diamonds. The demand curveis upward sloping in this case. The non-price determinants of demand (factors that change demandor shift the demand curve)
Of course, price is not the only thing that affects demand in a market.There are plenty of other factors. A list of them: ● Income ● Prices of related goods (complement and substitutes) ● Tastes of individual consumers ● Fashion and Trends (Oh look a new handbag has just came out!Got to buy it!) ● Seasons/ Weather (Ice creams and heating gas) ● Expectations (Going to get a raise at work. Going to buy my familysome presents) ● Number of buyers as opposed to Quantity demanded of each individual. Before we go on, we have to explainwhat Complement and Substitutegoods are. Complement goods are twoor more goods that consumers usuallybuy together, for example ﬂour andeggs (basically to make cake).Substitute goods are two differentgoods that people buy in place of each other, for example Coca-Cola and Pepsi. If you buy Pepsi, you do notbuy Coca-Cola, they substitute one another. When anything other than price affects demand ceteris paribus, thedemand curve shifts. If the price changes, there’s a contraction/expansion in demand. Hopefully you know enough English to know which one represents a rise and a fall. The demand onlyrises/falls at each price level if price does not affect it. (By the way thisis only applicable to price-quantity graphs)
Let’s go back to our demand curve. The thin arrow representsmovement along the demand curve. This is because only price changesceteris paribus. A shift in the demand curve is when curve D1 moves toD2… represented by the large arrow. Things that affect demand otherthan price count as a shift ceteris paribus. If it shifts right, then of coursethat means demand is increasing; the quantity demanded is higher ateach price level. HL ONLY – Linear demand functions (equations), demand schedulesand graphs Usually they come in the form Qd = a-bP. This is quite annoying toexplain. I mean the maths involved is really basic, just that the logic isconfusing. Let’s just start with an example. Qd= 60-5P. So basically it’s like a normal linear function in Maths. Just that whenyou substitute x and y like in maths, instead of y = something, you get x= 60-5y. So unlike maths, instead of 60 being the y-intercept, it is thex-intercept instead, or where the curve touches the demand axis. Don’tworry if you do not get it, read it a few more times, and get a drink.There will be a diagram below for visual learners. So why does it touchthe quantity axis there? Well, remember that where the axes touchprice and demand are 0. So when price is 0, and you plug it in theequation, you get Qd = 60-5(0) or Qd = 60. Simple right? That’s why ittouches the quantity axis at 60, where price is as low as possible on thegraph. So what is the y-intercept for these functions? Basically you reverse thedemand function, or make P the subject in Qd = 60-5P. This means thatyou do this:
Qd = 60-5P Qd -60 = -5PQd -60 = P-5 Then you pretend that Qd is 0. Sobasically that’s -60 divided by -5equals P. Work it out, you get 12.So basically the curve touches theprice axis at $12. So why are weﬁnding out intercepts? Basically, a line only needs two points. You can draw the line between bothintercepts. To check, you can always ﬁnd a third point. With the Qd =60-5P, you can just choose any number between 0 and 12, since $12 isthe point when the demand curve is about to disappear from the graph.Work it out and if it agrees with the graph, it should be correct. Unlessyou did everything wrong… hopefully not. For example choosing $5 willgive you 35, which agrees with the graph I have just drawn.