1.2.2 Demand Flashcards
What is demand
Demand is defined as the quantity of a good or service that consumers are willing and able to buy at any particular price.
How does a consumer show effective demand
For a consumer to show effective demand this desire has to be backed up by an ability to pay.
What are the 2 effects of a negative slope on a demand curve
substitution effect
income effect
what is the substitution effect
A higher price charged by one firm will make consumers less willing to buy from that source and they will switch demand to a rival seller. This switching away from firms that raise their prices is called the substitution effect.
What is the income effect
This is effectively a cut in the spending power or real income of the buyer. This is referred to as the income effect.
What non price factors affect demand
The income of consumers will affect the ability to pay
The price of close substitutes will affect the willingness to pay
The price of complements will affect both the willingness and ability to pay
The degree of advertising of the product will affect the willingness to pay
The tastes and preferences of the consumer will affect the willingness to pay
The quality of the product will affect the willingness of the consumer to pay
The size and age distribution of the population can affect the willingness to buy
Important when describing a demand curve
When we draw our negatively sloped demand curve we must make a critical simplifying assumption – that all the other factors that affect demand are unchanged. Economists use a Latin phrase to invoke this assumption - “ceteris paribus”
It is usual to say, “a fall in the price of a good will, ceteris paribus, lead to a rise in the quantity of the good demanded”
factors that shift the position of a demand curve
Changes in consumer income
This will alter the consumer’s ability to pay for the good or service.
The price of substitutes
This will alter the consumer’s willingness to buy a particular product or service.
The price of complements
Tastes and preferences
Population size and structure
Cost and availability of credit
why does a change in income cause a shift on the demand curve
Income could change because wage rates paid by employers have been altered.
Retired people may have been given an increase in their pension levels
The low paid may have benefitted from a rise in the National Minimum Wage
The unemployed may have received a rise in Jobseekers’ Allowance
The government may have altered the rate of income tax. This would lead to a change in disposable income i.e. income after tax deductions
why does the price of a substitute cause a shift on the demand curve
what is the definition of a substitute
what is an example of a substitute
This will alter the consumer’s willingness to to buy a particular product or service.A rise in the price of a substitute is likely to cause consumers to switch their spending towards the alternative.
Definition: Substitutes are two goods/services in competitive demand
Rented accommodation and owner occupied houses
Two local independent schools
Smartphones with iOS or Android operating systems
Gold and bitcoin
why does the price of a complement cause a shift on the demand curve
definition of a complement
example of a complement
A rise in the price of a good will lead not only to a fall in demand for that good but also any complementary products that are bought to go with it.
Definition: Complements are two goods/services in joint demand
Cereal and milk
Smartphone and service contract
Fruit and vegetables
why will tastes cause a shift on the demand curve
why might tastes change
Changes in consumer tastes will alter their willingness to buy particular products. Tastes may change because of:
Changes in fashion
Good or bad publicity
The persuasive powers of advertising
Seasonal changes
Changes in the quality of the good
why will population size cause a shift on the demand curve
Again this will also affect the willingness to buy. Increasing population will mean there are more potential customers. As the population ages there will be a change in the underlying composition of demand e.g. from increased demand for post-natal care to primary education to cars and houses and eventually to care homes and hip replacement surgery.
why will cost and availability of credit cause a shift on the demand curve
The demand for some goods depends critically on the availability of credit to finance their purchase e.g. housing, cars and new kitchens. The more expensive the rate of interest on such loans, the less able consumers will be to buy the products.
what is individual demand
example of demand
The quantity of a good or service that an individual consumer is willing and able to buy at a different prices
The number of takeaway pizzas consumed by a student in a year
The number of NUFC home games attended over the course of a season by a non-season ticket holder
what is market demand
example of market demand
The total quantity of a good or service bought by all consumers in a particular market at different prices
The national demand for private education places
The number of households with a Sky subscription
what is joint demand
examples of joint demand
When two goods are bought together as complements
Air pods and air pod cases
Train travel and coffee
Fruit and vegetables
what is competitive demand
examples of competitive demand
When two goods are rivals or substitutes for consumer spending
Petrol cars and electric cars
iPhone versus Samsung galaxy smartphone
State education or independent school
what is derived demand
examples of derived demand
When the demand for a factor of production is the direct result of the demand for the output it produces
The demand for iron stems from the demand for ships
The demand for land is derived from the demand for houses
The demand for pie makers comes from the demand for pies
what is the law of demand
the repeated observation that the quantity demanded of a good or service varies indirectly with its price
what is utility
a measure of consumer satisfaction or consumer welfare
what is total utility
the total accumulated satisfaction from the consumption of a good or services
what is marginal utility
the extra satisfaction from the consumption of one more unit of a good or service
what is the law of diminishing marginal utility
the repeated observation that consuming successive units of a good leads to a decreasing amount of extra satisfaction
