1.2.2 Demand Flashcards
What is demand?
Demand is the quantity of a good or service that consumers are willing and able to buy at a given price during a given time period.
Demand and Price (movements)
> Demand varies with price. Generally, the lower the price, the more demand there is due to affordability. This can be illustrated with a demand curve.
(diagram sheet 1)
At price P1, a quantity of Q1 is demanded. At the lower price of P2, a larger quantity of Q2 is demanded. This is an extension in demand.
At a higher price of P3, quantity demanded falls to Q3. This is a contraction in demand.
Only changes in price cause these movements.
Conditions of demand (shifts)
> (diagram sheet 1)
A shift from D1 to D2 is a decrease in demand, because there are fewer goods demanded at each and every price. A shift from D1 to D3 is an increase in demand, as there are more goods demanded at each and every price.
The factors that shift demand are known as the conditions of demand.
What are the conditions of demand?
> Income - for most goods, if consumers have more disposable income, they are able to afford more goods, so demand increases.
Price of related goods - these can be substitutes or compliments. A substitute can replace another good, so if the price falls for a substitute, demand will fall for the original product. A complement is a product that can go with another. If the price rises for a complement, demand will fall for the original product.
Population - an increase in the population is likely to increase demand for products.
Tastes/Fashion - if consumer tastes change then demand will change. If something becomes less fashionable demand will fall.
Advertising - a successful advertising campaign will increase demand, but a successful campaign from a competitor will decrease demand.
Seasons - some products have seasonal demand.
Expectations - expectations for the future will impact demand, e.g. if consumers expect a price decrease then demand will fall until then.
Legislation - laws can affect demand.
Derived, Composite and Joint demand:
> Derived - when demand for one good is linked to demand of a related good.
Composite - When the good demanded has more than one use.
Joint - when goods are bought together.
Diminishing Marginal Utility
> The demand curve is downward sloping, showing the inverse relationship between price and quantity.
The law of diminishing marginal utility states that the satisfaction derived from the consumption of an additional unit of a good will decrease as more of a good is consumed.
This explains why the demand curve slopes downwards. The higher the quantity bought, the lower the marginal utility (the utility from the last one) derived from consuming the product. So buyers will pay higher prices if the quantity for sale is lower.
Consumer Surplus
Consumer surplus is the difference between how much buyers are prepared to pay for a good and what they actually pay.
The paradox of value
> Occurs when consumers pay a high price for goods like diamonds, which were unnecessary for human existence, whilst the price for necessities was very low.
The law of diminishing marginal utility can help explain it. If there are few goods available to buy (diamonds), consumers are willing to pay a high price for them because their marginal utility is high.
