IB Economics Demand

IB Economics Demand Revised

Target Question:

"What is demand in IB economics and why is it Relevant?"

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Let's go back to a couple of months ago. It's January. The holiday season is over, you're broke, and ASOS drops a massive sale. Suddenly every hoodie you ignored at full price looks absolutely essential. You're filling your basket like it's your last day on earth.

This is basically the law of demand in real life.

What Is Demand?

Let's get the definition sorted first, because IB Economics examiners absolutely love it when you mention this in your exam answers.

Demand

Demand is the quantity of a good or service that consumers are willing and able to purchase at a given price over a specific time period.

Notice those two words: ready and able. Both matter. You might want a £1,200 PS5 Pro, but if you can't actually afford it, that's not demand in the economic sense - that's just wishful thinking. Demand requires both the willingness and the purchasing power.

Price, put simply, is what you hand over to get the thing. Easy enough.

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The Law of Demand: Why Cheap Stuff Flies Off the Shelves

The law of demand states that, ceteris paribus, as price rises, quantity demanded falls - and as price falls, quantity demanded rises.

In plain English: stuff gets expensive → people buy less of it. Stuff gets cheaper → people buy more.

Think about how Ryanair operates. When they drop flights to Malaga for £9.99, suddenly half of Britain is booking a last-minute break. When prices creep back up to £150? People start reconsidering whether they really need a tan. Same destination. Completely different demand.

This is why the demand curve slopes downward - as you move from left to right along the curve (lower prices), quantity demanded increases.

But Why Does Price and Quantity Demanded Have a Negative Relationship?

There are actually three solid reasons for this, and you need to know all three for your exams.

1. The Income Effect

The income effect occurs when a price change alters consumers' real purchasing power, causing them to buy more or less of a good even though their income hasn't changed.

When the price of something falls, your real income effectively increases - even if your salary hasn't changed. You've got more buying power. So naturally, you can afford to buy more.

Think about petrol prices. When fuel got cheaper in early 2023 across parts of Europe, families could suddenly afford longer drives, more weekend trips, and the odd extra tank without flinching. Their wages hadn't gone up, they didn't have better jobs than before - but falling prices meant they had more in real terms.

2. The Substitution Effect

The substitution effect describes how consumers switch to cheaper alternatives when the price of a good rises relative to substitutes.

When something gets pricier, consumers start looking around for alternatives. And there are almost always alternatives to everything.

In 2025, research shows around 40% of consumers are actively swapping branded goods for store-brand alternatives - that's the substitution effect happening at a massive scale. When branded cereals hit £4.50 a box at Sainsbury's, suddenly the Sainsbury's own-brand sitting next to it for £1.80 looks pretty tasty. Same breakfast. Lower price. The substitution effect in action.

3. The Law of Diminishing Marginal Utility

The law of diminishing marginal utility states that each additional unit of a good consumed yields less satisfaction than the previous one - which is why consumers only buy more when prices fall.

Okay, this one is actually rather simple. The more of something you consume, the less satisfaction you get from each extra unit. That's it.

Imagine you're absolutely starving and someone puts a pizza in front of you. First slice? Incredible. Second slice? Still great. Third slice? Alright. Fourth slice? You're eating it out of obligation. Fifth slice? You're regretting your life choices.

Each slice gives you less extra satisfaction than the last. That's diminishing marginal utility.

This is why, as consumers, we're only willing to buy more of the same product if the price falls - because we're getting less satisfaction per unit, so we need a lower price to justify it.

IB Economics Real-life Example:

During lockdown, demand for luxury handbags collapsed. Not because prices changed, but because people weren’t going anywhere - and incomes were falling.

However, consumers aren't as rational as economists like to think

A Quick Word on Utility: Measuring Happiness

Economists actually have a (slightly ridiculous but genuinely useful) concept for measuring satisfaction. It's called a util - a subjective measure of the happiness or benefit gained from consuming a good or service.

There are two versions you need:

• Total utility = the overall satisfaction from all units consumed. So, eating that entire pizza gives you, say, 40 utils total.

• Marginal utility = the extra satisfaction from one more unit. That fourth slice might only give you 3 utils - much less than the first slice that gave you 15.

It's a bit abstract, sure - but it's the basics of why demand curves slope the way they do. Lower prices compensate for that falling marginal utility, encouraging us to buy more.

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From Individual Demand to Market Demand

Your demand for something and your mate's demand for the same thing are two different things. But when you add up everyone's demand at every price level, you get the market demand curve.

IB Economics Real-life Example: say Real Madrid charges €80 per ticket for a home game. Adult female fans want 10,000 tickets. Students want 20,000. Adult male fans want 40,000. Add those up and the market demand is 70,000 tickets. That's the combined demand of all buyers in the market at that price.

Simple concept.

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What Actually Shifts Demand? The Non-Price Determinants

Demand doesn't change just when prices change. A whole bunch of other factors can push the demand curve left or right.

Habits, Fashion & Taste

Think about Stanley cups. A year ago, nobody outside of outdoor enthusiasts owned one. Then TikTok happened, every influencer in the known universe was holding one, and suddenly there were queues outside Target in the US. Demand for a water bottle - a water bottle! - went through the roof because of a taste shift.

Conversely, remember when fidget spinners were everywhere? Exactly. Demand crashed faster than you can say "fleeting trend."

Income

As people's real disposable income rises, they generally demand more goods and services. In the UK in 2025, consumers have been cutting back on grocery spending to prioritise travel and experiences which tells you that as income allows, people shift their spending patterns dramatically.

This connects to two types of goods you'll need to know:

Normal goods:

Normal goods are products for which demand increases as consumer income rises, and decreases when income falls.

Demand rises as income rises. Things like holidays, new cars, gym memberships. The demand curve shifts right when incomes go up.

Inferior goods:

Inferior goods are products for which demand falls as consumer income rises - consumers trade up to better alternatives when they can afford to.

Demand falls as income rises. Think budget supermarket own-brands, second-hand clothing, or cheap cuts of meat. When people earn more, they trade up. The demand curve shifts left.

Worth noting: these labels aren't value judgements. What counts as an "inferior good" for one person might be completely fine for another. It all depends on the individual consumer.

Substitutes and Complements

Substitute goods compete with each other. Pepsi vs Coke. Spotify vs Apple Music. Netflix vs Disney+. If the price of one rises, demand for the other tends to increase as consumers switch.

Complementary goods go together. Think printers and ink cartridges. Gaming consoles and games. If the price of a console rises and fewer people buy one, demand for the games falls too - even if game prices haven't changed.

Advertising

Big brands don't spend billions on advertising because it's fun. They do it because it works. Amazon, Disney, and Walmart collectively pour hundreds of millions into ads every year specifically to shift demand curves rightward. Every viral ad campaign, every celebrity endorsement, every catchy jingle - it's all designed to get you to want something that perhaps you didn't want before.

Government Policies

Governments can push demand up or down through regulation and policy. Age restrictions on alcohol and tobacco reduce legal demand. Subsidies on electric vehicles - like the UK's schemes to encourage EV uptake - boost demand artificially. If the government bans something outright, legal demand crashes to zero (though, as economists would note, it doesn't always disappear entirely...).

The State of the Economy

When the economy's booming - jobs are plentiful, wages are rising, confidence is high - people spend freely. When recession creeps in, they batten down the hatches. In early 2025, 62% of Brits felt the cost of living crisis still wasn't improving, which is exactly why consumer spending on discretionary goods remained cautious throughout the year.

The 2008 financial crisis and COVID-19 are the classic IB Economics examples here. Both caused massive leftward shifts in demand curves across entire economies, as households cut back hard in the face of uncertainty.

Movements vs. Shifts: Don't Get These Wrong

This is a classic demand trap, and it catches people every year.

A change in price causes a movement along the demand curve - you're simply sliding up or down the existing curve. The curve itself doesn't move.

A change in a non-price factor (income, tastes, advertising, etc.) causes a shift of the entire demand curve - either to the right (demand increases) or to the left (demand decreases).

So if Greggs puts up the price of a sausage roll by 20p, that's a movement along the demand curve. If Greggs launches a brilliant new ad campaign and everyone suddenly needs a sausage roll, that shifts the whole curve to the right.

One more thing - and this confuses a lot of my students: if the government slaps a sales tax on a product, that does not shift the demand curve to the left. The tax is placed on firms, not directly on consumers. It raises production costs, which pushes up the price - and that price increase then causes a contraction (movement) along the demand curve. Different mechanism, different diagram. please remember it.

An indirect tax does not shift the demand curve - it raises the price, causing a contraction (movement) along the existing curve.

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Summary for your IB Economics Course

Demand isn't just a line on a graph. It's the story of every purchasing decision every consumer makes, every single day - from whether you grab a Greggs on the way to school, to why Tesla can sell fewer cars when interest rates rise, to why flights fill up the second airlines cut prices.

Research from McKinsey in 2025 found that consumers are fundamentally redefining what "value" means to them - and that's shifting demand patterns across entire industries. The frameworks you're learning right now? They're exactly what analysts, governments, and businesses use to make sense of all of it.

Once you can explain why demand curves shift and what causes movements versus shifts, you're already thinking like an economist. And that, genuinely, is a useful skill - well beyond the IB exam.

Frequently Asked Questions: Demand in IB Economics

Q1: What is the difference between demand and quantity demanded? Demand refers to the entire demand curve - the relationship between price and quantity across all price levels. Quantity demanded is a single point on that curve - the specific amount consumers will buy at one particular price. A price change moves you along the curve (quantity demanded changes); a non-price factor like income or advertising shifts the whole curve (demand changes).

Q2: What are the three reasons the demand curve slopes downward? Three effects explain why higher prices lead to lower quantity demanded: (1) the income effect - a higher price reduces your real purchasing power, so you can afford less; (2) the substitution effect - a pricier good pushes consumers towards cheaper alternatives; and (3) the law of diminishing marginal utility - the more of something you consume, the less satisfaction each extra unit gives, so you're only willing to buy more if the price drops.

Q3: What causes a shift in the demand curve? A demand curve shifts when something other than the product's own price changes. The main non-price determinants are: income, tastes and fashion, prices of related goods (substitutes and complements), advertising, government policy, and the state of the economy. A rightward shift means demand has increased; a leftward shift means it has fallen.

Q4: What is the difference between a normal good and an inferior good? For a normal good (like holidays or new cars), demand rises as income rises. For an inferior good (like budget supermarket own-brands or second-hand clothing), demand falls as income rises - because consumers trade up to better alternatives when they can afford to. The same product can be a normal good for one person and an inferior good for another, depending on their income level and preferences.

Q5: Does a sales tax on a product shift the demand curve to the left? No - and this is a classic exam question. An indirect (sales) tax is levied on firms, not directly on consumers. It raises production costs, which pushes the market price up. That higher price then causes a contraction - a movement along the existing demand curve, not a shift of it. The demand curve itself stays in place.

Stay well,

Related Topics:

IB Economics Hub Page your IB Economics daily guide

IB Economics Calculations Book Access Unit 2 Demand for practicing Calculations and related calculations exam questions, together with IB model answers and marking schemes. Practise demand analysis in Paper 2 data response questions

IB Economics Microeconomics Hub Page for accessing all microeconomics topics

IB Economics Diagrams Page visit unit 4 for all IB Economics demand diagrams and Graphs, learn them

IB Economics Price Elasticity of Demand (PED) Page PED extends the price-quantity relationship directly, explore this.

IB Economics Income Elasticity of Demand (YED) Page YED is the formal measurement of everything the normal/inferior goods section describes in this article

IB Economics Cross-Price Elasticity (XED) XED is literally the formula version of what this section covers

IB Economics Activity Book Page Check Module 2 Microeconomics Unit 2.1 Demand exam practice, activities, model answers and IB Marking schemes

IB Economics Market Equilibrium Page once you've got demand, the next step is seeing it meet supply, visit the equilibrium page.

IB Economics Government Intervention Hub Page how governments intervene in markets

IB Economics Subsidies Hub Page Subsidies push demand in the opposite direction

IB Economics Macroeconomic Equilibrium Page recessions shift demand curves across entire economies

IB Economics Regulation and Deregulation Page how regulation and taxes shape consumer behaviour

IB Economics Market Failure Inequality and the Circular Flow Page why income inequality shapes who can demand what

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