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
