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Study Notes

Theory of Demand

Level:
GCSE, AS, A Level, IB
Board:
AQA, Edexcel, OCR, IB, Eduqas, WJEC
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Demand is the quantity of a good or service that consumers are willing and able to buy at a given price in a given time period

Effective and latent demand in markets

Income and Substitution Effects and the theory of demand

Income effect

  • A fall in price increases the real purchasing power of consumers
  • This allows people to buy more with a given budget
  • For normal goods, demand rises with an increase in real income

Substitution effect

  • A fall in the price of good X makes it relatively cheaper compared to substitutes
  • Some consumers will switch to good X leading to higher demand
  • Much depends on whether products are close substitutes
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