1.2.2 Demand Flashcards
define demand
the quantity of a good or service that consumers are willing and able to purchase at a given price over a given period of time
how is demand different to wants
demand is a want backed up by the ability to pay - effective demand
what is latent demand
when there is a willingness to buy among people for a good or service, but where consumers lack the purchasing power to be able to afford the product
describe the relationship between price and quantity demanded
inverse/negative
what assumption is made when deciding the relationship between price and quantity demanded
ceteris paribus
what are the two reasons for the relationship between price and demand
income effect and substitution effect
explain the income effect
as the price of a product falls, the consumer has more income left (real income has increased) that enables them to buy more of the good
explain the substitution effect
as the price of the product falls, consumers switch into the cheaper product away from more expensive substitutes, increasing demand
what are the four types of demand
derived demand, joint demand, composite demand, competitive demand
explain derived demand, giving an example
demand that arises due to demand for another product e.g demand for cars increases demand for steel
explain joint demand, giving an example
demand for goods which are interdependent, such that they are demanded together e.g toothbrushes and toothpaste
explain composite demand, giving examples
demand for a good that has multiple uses e.g land, steel, oil
explain competitive demand, giving examples
demand for goods that are in competition with each other e.g chocolate, crisps
define total utility
represents the satisfaction gained by a consumer as a result of their overall consumption of a good
define marginal utility
represents a change in satisfaction resulting from the consumption of the next unit of good
what is the law of diminishing utility
as a person consumes more units of a particular good or service while keeping the consumption of other goods constant, the marginal utility gained from each extra unit will decrease
explain how the hypothesis of diminishing marginal utility supports a downward sloping demand curve
- consumers generally seek to maximise their overall satisfaction when making consumption choices
- as they consume more, extra satisfaction they gain from each extra unit becomes smaller
- this means they are willing to pay less for each subsequent unit of a good (provides them with less satisfaction) and are willing to buy more of a good when the price is lower because the reduction in price makes each additional unit more valuable in terms of the satisfaction it provides
when is total utility maximised
when a consumer consumes the quantity of that product where the marginal utility is zero
what will happen if the utility gained from the consumer is greater than the price and why does this support the downwards sloping demand curve
they will keep on consuming, so a rational consumer will keep on consuming until MU=P
therefore the demand curve is downward sloping because at high prices there are fewer situations where MU>P, so there will be less demanded at that price and the opposite is true at lower prices
what causes a movement along the demand curve
changes in the market price of the product
give the analysis for a contraction in demand
a rise in price from p to p1 is shown by a movement along the demand curve with quantity demanded falling from q to q1 - a contraction in demand
give the analysis for an expansion in demand
a fall in price from p to p1 is shown by a movement along the demand curve with quantity demanded rising from q to q1 - an expansion in demand
what causes the demand curve to shift
non-price factors
what are the non-price factors causing a shift in demand
population
advertising
price of substitutes
incomes/state of the economy
fashion and trends
interest rates and government policies
price of complements
explain how population causes a shift in demand
increased population leads to and increase in total demand - outward shift
explain how advertising causes a shift in demand
better and more advertising increases awareness of the product and people are more persuaded to buy, leading to an increase in demand - outward shift
explain how the price of substitutes causes a shift in demand
an increase in the price of substitutes causes an increase in demand for the original product - outward shift
explain how income causes a shift in demand
for a normal good, increased real income increases demand
for an inferior good e.g public transport, value branded goods, an increase in real income decreases demand
explain how fashion and trends causes a shift in demand
if it is in fashion then increases demand - outward shift
explain how interest rates causes a shift in demand
decreased interest rates increase demand as the cost of borrowing and reward for saving is lower, this is especially true for goods bought on credit e.g car
explain how the price of complements causes a shift in demand
a decrease in the price of complements increases demand - outward shift
