Why We Don’t Pay £12 for a Biscuit | IB Economics Demand Explained

If you’ve ever looked at something in a shop and thought, “I’d buy that if it were cheaper,” congratulations - you’ve just experienced demand in action.

Demand in economics isn’t just about wanting something. I want a trip to Japan and maybe a Rolex, but my bank account says I’ll settle for sushi and a Casio. In economics, demand means being both willing and able to buy a good or service at a particular price, during a specific time.

The law that ties this all together? The law of demand. It’s simple: as the price of a good rises, quantity demanded falls. And when the price falls? Quantity demanded goes up. This inverse relationship is why demand curves slope downwards. But why does this happen?

Why Price and Quantity Move in Opposite Directions

1. The Income Effect

If the price of Greggs’ sausage rolls dropped to 20p, you’d feel richer - even though your salary hasn’t changed. Lower prices increase your real income, meaning you can afford more with the same budget.

2. The Substitution Effect

When Netflix raised prices (again), many students suddenly remembered YouTube and Amazon Prime still exist. Price goes up? People switch to cheaper alternatives, loyalty has limits.

3. Diminishing Marginal Utility

The first cookie hits the spot. The third is decent. By the sixth cookie? You feel regret. As we consume more of the same good, the marginal utility - the satisfaction from each extra unit - declines. Unless the price falls, we won’t keep buying.

Economists even have a unit to define this satisfaction: utils. It’s not a real currency, but it helps model human behaviour. You can think of total utility as the joy you obtain from eating all the cookies. Marginal utility is the joy obtained from consuming each extra one. If utils drop with every bite, you’ll only want more if the price drops too.

Movements Along vs. Shifts of the Demand Curve

Here’s where many students trip up. Let’s clear it up:

• A movement along the demand curve happens when the price of the good itself changes.

• A shift of the entire curve happens when a non-price factor changes.

Right Shift (Increase in Demand)

More of a good or a service is demanded at every price point.

Causes:

• Higher real income (for normal goods)

• Positive trends or advertising

• Population growth

• Lower price of complementary goods

• Higher price of substitute goods

Example:

After Beyoncé wore Tiffany & Co. sunglasses on tour worth $15,000 demand shot up overnight - they were the same price, but suddenly everyone wanted them. That’s a rightward shift.

Left Shift (Decrease in Demand)

Less of a good or service is demanded at every price.

Causes:

• Lower incomes (again, for normal goods)

• Outdated fashion trends

• Health warnings or negative press

• Legal restrictions

• Recession

Example:

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

Types of Goods: Know Your Categories

Normal Goods

These are your everyday items that people buy more of when income rises. Think: smartphones, coffee shop drinks, Air Pods.

Example:

If a student gets a part-time job and starts going to Pret A Manger every morning instead of bringing instant coffee from home - that’s a normal good in action.

Inferior Goods

Demand for these falls when income rises. It’s not about the product being “bad,” the product is just seen as less desirable because people can afford better options.

Examples:

• Instant noodles

• Budget and low-cost supermarket own brands

• Second-hand clothes (although with fast fashion backlash, that one is changing)

Luxury Goods

These are a step beyond normal goods. As income rises, demand rises more than proportionately.

Examples:

• Designer handbags (Chanel, Louis Vuitton)

• High-end tech like the latest iPhone Pro Max

• First-class travel or boutique hotels

Luxury goods can sometimes be Veblen goods - where demand increases because the price is high (people buy them to show off in front of others).

Non-Price Factors That Shift Demand

1. Income

• Income rises → more demand for normal / luxury goods (right shift)

• Income falls → more demand for inferior goods, less for normal ones (left shift)

2. Price of Substitutes/Complements

• If Coca-Cola gets expensive, people buy more Pepsi (substitute).

• If petrol prices go up, people might avoid SUVs (complement).

3. Tastes and Trends

• Crocs became trendy again. Right shift.

• Fidget spinners (the toy) faded fast. Left shift.

4. Advertising

• Apple’s marketing genius keeps demand high, even when phones cost over £1,000.

5. Government Policies

• Minimum age laws reduce demand for cigarettes.

• EV subsidies increase demand for electric vehicles.

6. The Economy

• During COVID, demand for restaurants collapsed.

• In post-pandemic booms, demand for travel exploded.

In Summary

Understanding demand isn't about memorising definitions - it’s about observing how humans behave when prices, incomes, and situations change. From McDonald’s value menus to Louis Vuitton price hikes, demand is everywhere.

So next time you buy something on sale, skip something overpriced, or get bored with your fifth slice of pizza - you’re doing economics.

Now, go explain to your friends why they’re irrational for paying £5 for coffee. You’ve earnt it.

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