Demand Flashcards
What is Demand?
Demand is the willingness and ability to consume goods and services at different prices.
As prices increase people will be less willing and able to consume. This is a contraction in demand.
As prices decreases people will be more willing and able to consume. This is an expansion in demand.
What is the demand Curve?
The Demand curve shows the relationship between price and quantity demanded.
As price is changed there is a change in demand.
What is a Movement in Demand?
A movement is a change in price.
At price £3 the quantity demanded of this good is 300 units.
If price increases to £5 then the quantity demanded contracts to 100 units.
If price decreases to £1 then quantity demanded increases to 500 units.
What are the other Factors of Demand?
The definition of demand and the demand curve applies ceteris paribus as there are other factors that determine demand.
This means that it is not only price of goods and services that determine our demand.
We broadly group the factors that determine demand, other than price, in the list below.
Tastes and preferences Substitutes Compliments Income Consumer population Interest rates
What Is Ceteris Paribus?
Ceteris paribus, literally “holding other things constant,” in economics this is used to hold all factors, other than price, constant.
What does Tastes and preferences mean?
Tastes and preferences means the things that determine what we like to consume.
For example, Nike spends $millions on advertising and branding. This is because a successful brand will mean we will want to consume more.
Another example is we generally have a taste and preference for healthy products.
What is a Substitute Good?
Substitutes are alternative products that can be consumed instead.
For example, consider the demand for Coca Cola.
At a given price there will be a certain demand for Coca Cola.
If Pepsi decrease their price or improve their product then there will less demanded of Coca Cola.
What is a Complement Good?
A complement good is a good that goes with another good.
For example, cars and petrol and complement goods.
For example, consider the demand for a new car at a given price.
If the price of petrol increases, then we can expect the demand for the new car will fall.
This is because consumers have to consider the price of a new car and the price of petrol..
What is Income?
Income is the money received by households.
This is usually from wages and salaries, but can also be from returns from investments, pensions and benefits.
If consumer incomes increase, we expect demand to also increase as consumers will be more willing and able to consume at a given price.
However, sometimes demand can fall with a rise in income if the goods are inferior goods (see XED).
What is Consumer Population
Consumer population is the amount of people able to consume a good.
The bigger the population, the bigger the consumer population.
Also, rules and regulations affect consumer populations.
E.g. people under the age of 18 are unable to consume alcohol.
What are interest Rates?
An interest rate is the cost of money.
If I borrow money from a bank, they will expect me to pay back what I borrowed plus the interest rate. The interest rate is added to the cost of the loan.
If I save money in a bank, I will receive an interest rate. The interest rate is added to the value of my savings.
The higher the interest rate, the less likely I will borrow and the more likely I will save. This will reduce demand.
How do the Factors other than Price affect Demand?
Changes in these factors cause a shift.
This is because the amount of what we are willing and able to consume at a given price will change if one of these factors change.
For example, there is a certain amount of demand for new cars at a given price.
If incomes increase, then the demand will increase.
What are Shifts in Demand?
A shift is when a factor other than price changes demand.
What causes inward demand shifts?
A shift inwards in the demand curve will be caused by:
A decrease in tastes and preferences.
A reduction in the price of a substitute good.
An increase in the price of a complement good.
A decrease in consumer population.
An increase in interest rates
What are Normal Goods?
The demand for a normal good has a positive relationship with income.
i.e. if income increases then so will demand.
