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 in a given time period.
What is derived demand?
Derived demand is the demand for a factor of production used to produce another good or service. For example, steel - the demand for steel is linked to market demand for cars and construction of new buildings
What is the law of demand?
There is usually an inverse relationship between the price of a good and demand.
1. As prices fall, we see an expansion/extension of demand.
2. As prices rise, there will be a contraction of demand.
What is the ceteris paribus assumption applied on demand curve?
economists assume all factors are held constant except one – the price of the
product itself.
What does the demand curve show?
A demand curve shows the inverse relationship between the price of an item and the quantity demanded over
a period of time.
What are the effects that show why more is demanded as price falls?
- The Income Effect
- The Substitution Effect
Explain the income effect.
When the price of a good falls, the consumer can maintain the same consumption
for less expenditure; effectively, this increases ‘real income’. Provided that the good is normal (i.e.
one for which demand rises when income rises, and demand falls when income falls), some of the
increase in real income is used to buy more.
Explain the substitution effect.
When the price of a good falls, ceteris paribus, the product is now relatively
cheaper than an alternative and some consumers will switch their spending from the alternative good
or service. The more substitutes there are in the market and the lower the cost/inconvenience of
switching, the bigger the substitution effect is likely to be.
How can the law of diminishing marginal utility help explain the law of demand?
As more of a good is consumed, the additional utility (satisfaction) from each extra unit consumed will fall. Because consumers are assumed to be rational, they will not pay more for a good than the additional utility it provides. Therefore, price and quantity demanded are inversely related.
How do we draw demand curves?
What causes a movement along the curve?
- A CHANGE IN THE PRICE OF THE PRODUCT ITSELF CAUSES A MOVEMENT ALONG THE DEMAND
CURVE
How are shifts in the demand curve caused by?
Shifts in the demand curve are due to changes in “non-price factors” i.e. anything that might affect the demand
for a good other than its prices. An increase in demand is represented by a shift to the right (an outwards
shift) of the demand curve. A decrease in demand is shown by a shift to the left (an inwards shift) of the
demand curve.
What are non-price factors that cause shifts in demand?
- Changing prices of a substitute good or service (also known as goods in competitive demand)
- Changing price of complements (also known as products in joint demand)
- Changes in the real income of consumers:
When real income goes up, our ability to purchase goods and services increases, and this
causes an outward shift in the demand curve for ‘normal goods’
When real incomes fall there will be a decrease in demand (except for inferior goods i.e.
those that we buy less of as our income rises and more as our income falls) - Changes in the distribution of income - a more equal distribution of income can increase total
demand because relatively poorer consumers spend a higher proportion of their income - The effects of advertising and marketing to alter tastes and preferences
- Interest rates (e.g. affecting the cost of credit for “big ticket items” such as a new car or home
improvements) - Changes in the size and age structure of a population
- Seasonal factors for some goods and services
- Social and emotional factors affecting demand
