1.2.2 - Demand Flashcards
What is demand ?
When consumes are willing and able to buy a god or service at a particular price and at a particular period of time.
What is a movement along the demand curve caused by ?
A change in price.
Show a movement along a demand curve.
Draw shifts on a demand curve.
- D to D1 is a outward shift (Shift to the right).
- D to D2 is a inward shift (Shift to inward).
What is the mnemonic for factors that affect demand ?
P - Population
A - Advertisment
S - Substitute goods ( price of them) & Seasons
I - Income
F - Fashion and Trends
I - Interest rates
C - Complements (price of them)
Population
Population - The higher the population you have the more people there will be who will be able to purchase a good at any given price leading to an outward shift in demand if population increases.
Advertisement
Advertising - If done successfully advertising increases the desirability of a product. As such more people will want to purchase the good at any given price and so if advertising is successful it will lead to an outward shift in demand
Subsite goods & Seasons
● Seasons : Some products will find their demand affected by the weather. For example, hot summers cause an increase in demand for sun cream whilst wet summer cause a decrease in demand for umbrellas.
Income
Generally when incomes rise the demand for goods rises as well. This is because when salaries and wages increase, people have more disposable income to spend on goods meaning that there will be more demand for a product at any given price, shifting the demand curve out. These goods are known as normal goods e.g. Audi car
Fashion and trends
Interest rates
Interest rates can also affect the demand for a good. This is because some goods are purchased with borrowed money e.g. a credit card where the consumer has to pay interest to the lender. Therefore if interest rates decrease it becomes less expensive to purchase goods with borrowed money so more people will buy these goods and the demand for these goods will decrease, shifting the demand curve outwards.
Complementary goods
e.g milk and cereal. As a result complementary goods are said to be in joint demand. As the price of one good increases the demand for the other good will decrease. For example if the price of milk decreased the demand for cereals would increase. This is because as the price of milk decreased the demand for milk would rise as the quantity demanded and the price are inversely proportional. So as more consumers are willing to buy milk, more consumers will be willing to buy cornflakes as they usually buy milk and cornflakes together, shifting the demand curve out for cornflakes.
What is marginal utility
Marginal utility is the additional utility (satisfaction) gained from the consumption consuming another unit of a good.
What is the law of diminishing utility
The satisfaction derived from the consumption of an additional unit of a good will decrease as more of a good is consumed. (Assuming that the consumption of all other goods remain constant).
How does Diminishing marginal utility explain why the demand curve is downwards sloping
- As if more of a good is consumed, there is less satisfaction derived from that good. This means that consumers are less willing to pay high prices at high quantities since they are gaining less satisfaction.
This is one reason why firms offer discounts such as ‘50% off the second item’
