1.3.1 Demand Flashcards
Demand
the quantity of a product consumers and willing and able to buy at different prices in a specified time period
Effective demand
The combination of desire for a product or service with the ability or readiness to pay (must have sufficient, real purchasing power)
Latent demand
A desire for a product without the purchasing power, usually due to advertising
Derived demand
Demand for one product is strongly linked to the demand for another product (eg. demand for steel is linked to demand for new vehicles)
Consumer sovereignty
Suggests that consumers control resource use by deciding what to buy
Tastes
Involve consumer preferences for specific products → likely to change over time and be influenced by factors such as fashion
Advertising and branding
Ways in which businesses try to influence demand for their products; they can succeed in changing tastes
substitutes
Alternatives to a product in competitive demand
Complementary goods
Tend to be used together as they complement eachother in joint demand (eg ps5 and ps5 controller)
Income
Flow of money received by an individual or household over time → they are usually a reward for economic activity
Population
A group of people fitting a particular description, from the national population (total inhabitants) to the population in a target market
Price
Money amount paid by the buyer to the seller in a transaction → usually set by market forces but can sometimes be regulated by government
Demand schedule
A table showing the quantities demanded at different price levels
Demand curve
A graphical representation of the relationship between price and quanitity
Contraction of demand
Move up and left on a demand curve when price rises
Extension of demand
Move down and right on a demand curve when price falls
A shift in the demand curve
Occurs when quantity demanded changes for reasons other than price (eg. change in income, tastes and fashions)
Normal good
A good whose demand increases when people’s incomes increases
Inferior good
A good whose demand decreases as people’s incomes increases
how do businesses succeed, concerning consumers (3)
consumer choice
- a business will fail unless it can attract customers.
- When people make choices on what to do with their limited incomes, they have many alternatives –> any spending choice has an opportunity cost
- It is not enough that people admire or even want the product, but whether or not they will buy it
what should a rational consumer do
- A logical/rational consumer should make choices bringing the highest possible satisfaction from the available income
- in reality, consumers don’t always make rational choices
explain consumer sovereignty (3)
- Spending opportunities that attract are those that we value the most → we want things enough to pay for them, so businesses can earn sales revenue by supplying what we want
- suggests consumers ultimately decide what will be produced, and in the process how resources will be used
- Market forces, (involving consumers’ demand interacting with producers’ supply) lead to an allocation of resources that gives us the best selection of goods and services obtainable from existing resources –> CONSUMER SOVEREIGNTY
what are the limitations of consumer sovereignty (2)
- Depends on markets being competitive
- If clever advertising create desire for a product, it is really the businesses have power (eg fashion trends)
how is the market guided by the ‘invisible hand’ (2)
- increasing demand creates an incentive for businesses to produce more and meet that demand.
- If resources for this become scarce, costs rise and higher prices will make consumers buy less and vice versa (resources are readily available, costs lower, and lower prices will make consumers buy more increasing demand)
what is the relationship between price and quantity concerning DEMAND (4)
- Higher price of a normal good = higher opportunity cost = lower demand
- Lower price of a normal good = lower opportunity cost = product becomes more attractive = quantity demanded should increase
- This contributes to a large extension or expansion in total quantity demanded as consumers respond to changes in price
- There is an INVERSE relationship between price and quantity demanded
what does a demand schedule include
- a table
- lists prices
- lists quantity sold
what does a demand curve include
- shows the link between price and quantity demanded
- has a straight line diagram sloping downwards from left to right (NEGATIVE CORRELATION)
- assumes that the only variables affecting demand are PRICE –> omits other variables
describe movements along a demand curve
- A fall in the price causes an EXTENSION of demand (movement down and right along it)
- A rise in the price will cause a CONTRACTION of demand (movement up and left along the existing demand curve )
describe shifts in demand
- A change in any of the other relevant factors will cause a shift to a new demand curve
- A change that increases demand will move the curve to the RIGHT (sudden fashion of the product)
- A change that decreases demand the curve shifts LEFT (incomes fall)
how do demand curves work
- Movement along the same curve = when price changes
- Shifts to a new curve = when any other determinant changes
name 3 exceptions to the demand curve
- Speculation: gold, stocks, shares, property, special edition items
- Conspicuous consumption: snob value → something expensive seen as a status symbol (ie designer clothing, diamond jewellery, super cars)
- Giffen goods: people buy things that are expensive with rising prices because they still need it (ie potatoes in Irish potato famine)
Name 6 variables other than price that affect demand
- consumer tastes
- advertising
- substitutes
- complementary goods
- income available to the consumer
- population
Consumer tastes and preferences and demand
personal preferences partly shaped by experience, cultural background, mood or seasons
Advertising and demand
simply giving information, or shaped to persuade; strong brands tend to have advantages over unknown alternatives
Substitutes and demand
how attractive are alternative products to the consumer
a) Substitutes are goods in competitive demand, as they are replacements for other products
b) Price, design, make and taste determines which substitutes are more desirable/popular
Complementary goods and demand
two goods usually bought together as they are used together
a) They are in joint demand
b) A rise in price for the complementary good should cause the demand for the other good to decrease
c) They rise and fall in demand together, depending on the price change of only ONE of the pair/group
Income available to the consumer and demand
- income level and distribution affects how much people will spend
- If income distribution is uneven, certain demographics who tend to be poorer (etc. younger people) will buy less goods and services that are tailored for them, reducing their demand
Population and demand
- how many people are they to buy goods and services?
- The age structure of a population determines which goods and services are more popular as some are more appropriate for certain age demographics than others
Price and demand
how much do goods and services cost, and how much are people willing to spend?
Name 3 other variables that affect demand
- Interest rates
- Speculation → people are predicting prices rising/falling
- Social changes
explain normal and inferior goods
Normal goods are goods whose demand RISES as income rises and vice versa
The exceptions are inferior goods:
- Cheaper, poorer quality substitutes for some other good (basics foods, cigarettes, second hand clothes)
- Higher income = can switch from inferior good to a preferred alternative
- Demand for inferior goods FALLS as income rises
