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Demand: Is the amount of a good/service that a consumer is willing and able to purchase at a given price in a given time period.
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Market demand: the sum of all individual buyers’ demand for a good.
The Law of Demand – the relationship between price and quantity demanded
The law of demand states that there is an inverse relationship between price and quantity demanded (QD), ceteris paribus
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When the price ↑ the QD ↓
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When the price ↓ the QD ↑
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This is because as the P of a good increases, consumers are less willing and able to pay for the good.
Demand curve
Figure 2.1.1 Market demand as the sum of individual demands
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In a market of two buyers, market demand = individual D of buyer 1 + individual D of buyer 2.
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The DS curve is downward sloping due to the law of demand (as P increases, Qds decreases).
Movement along a demand curve
Figure 2.1.2 Movement along and shifts of the demand curve
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Only caused by a change in P of the good (ceteris paribus).
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According to the law of demand, if P decreases, Qd increases = downward movement from A to B.
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The change in Q due to change in P is called a change in Qd.
Shifts of the demand curve
Figure 2.1.3 Movement along and shifts of the demand curve
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Only caused by a change in non-price determinants of demand.
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Rightward shift = increase in D, Leftward shift = decrease in D.
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The change in Q due to the shifts in D is called a change in demand.
Non-price determinants of demand
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Change in income
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Real income: Dictates consumers’ ability to enjoy goods/services
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Direct relationship between income and demand
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Normal goods: Clothing, Restaurant meals, Electronic Device
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Income ↑ = QD ↑ = D shifts right (D1→D2).
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Income ↓ = QD ↓ = D shifts left (D1→D3).
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Inferior goods: Used goods, Generic Brands, Public Transportation
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Income ↓ = QD ↑= D shifts right (D1→D2).
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Income ↑ = QD ↓ = D shifts left (D1→D3)
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Luxury goods: Designer Clothing, High-end Vehicles, Fine Dining
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Demand increases disproportionately with income growth, but may decrease with substantial income declines.
2.
Changes in taste and preferences
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If goods/services become more preferable then demand for them increases
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Advertising or branding can change tastes/preferences
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Example: As vapes gained popularity, consumer preferences shifted in favour of vapes, leading to a rapid increase in demand.
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Prices of Substitute goods
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Substitutes: goods that satisfy a similar need (e.g. Pepsi and Sprite).
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Price of good A ↑ = QD of good B ↑ = D of good B shifts right, D of good A shifts left
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Price of good A ↓ = QD of good B ↓ = D of good B shifts left, D of good A shifts right
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This is because consumers of Sprite shift from Sprite to Pepsi
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Prices of Complementary goods
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Complementary goods are used together (e.g., computer and software).
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Price of good A ↑ = QD of good B ↓ = both good QD shifts left
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Price of good A ↓ = QD of good B ↑ = both good QD shifts right
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This is because the fall in P of computers results in a bigger quantity of computers being purchased =, so D for computer software increases.
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Change in numbers of consumers (demographic)
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Increase in the number of buyers raises demand; decrease in buyers lowers demand.
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Future price expectations
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If consumers anticipate a future price increase:
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They will purchase the good/service now = QD ↑
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If consumers anticipate a future price decrease:
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Delay their purchase = QD ↓
Assumptions underlying the Law of Demand (HL only)
1.
The income Effect
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Refers to the change in consumer’s purchasing power
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Price of a good ↓ = consumers' purchasing power ↑ =consumers can buy more with the same income.
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Price of a good ↑ = consumers' purchasing power ↓ = consumers can afford to purchase less with the same income.
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Assumes consumers adjust consumption patterns based on changes in purchasing power from price fluctuations.
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The substitution Effect
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Consumer replace relatively expensive goods/services with other alternatives
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Price of a good ↑ = Consumers seek alternatives offering similar satisfaction at lower costs.
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Assumes rational decision-making: Consumers respond to price changes by adjusting consumption based on perfect information.
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The Law of Diminishing Marginal Utility
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States that as more products are consumed, the satisfaction gained from each additional unit decreases.
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Marginal utility: Refers to the extra satisfaction obtained from consuming one more unit.
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Diminishing utility: Initially, the first unit provides higher satisfaction compared to subsequent units.
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A hungry person enjoys high satisfaction from their first hamburger but gains less satisfaction from each subsequent one.
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Makes consuming additional units more appealing for consumers, leading to a downward movement along the demand curve = Price of the good ↓