Demand Flashcards
Definition of demand
The quantity that purchasers are wiling and able to buy at a given price in each time period.
When does demand become effective ?
If demand is backed up by willingness and ability to pay the market price.
What is the law of demand ?
- Demand varies inversely with price - lower prices make products more affordable for consumers on limited budgets
- Higher prices reduce demand.
How does market price effect demand ?
- A fall in market price = extension in demand
- A rise in market price + contraction in demand.
What factors explain the downward sloping demand curve ?
- Substitution effect
- Income effect
- Diminishing marginal utility.
How does the substitution effect explain the downward sloping demand curve ?
As the price of a product decreases, it becomes more attractive compared to other similar products. Consumers are more likely to switch to the cheaper option, leading to an increase in the quantity demanded.
How does the income effect explain the downward sloping demand curve ?
When the price of a product falls, consumers effectively have more real purchasing power. This allows them to buy more of the product, leading to an increase in the quantity demanded.
How does diminishing marginal utility explain the downward sloping demand curve ?
As people consume more of a particular product, the additional satisfaction or utility from each additional unit begins to diminish. This means they are willing to pay less for each successive unit.
Definition of normal good
A good that experiences an increase in demand due to an increase in a consumer’s income.
Definition of effective demand
Demand for a good or service from consumers that is backed up with an ability to pay and not how much buyers would like to buy if they had unlimited resources.
Definition of derived demand
The demand for a factor of production that is used to produce another good or service.
Examples of derived demand
- Steel: demand for steel linked to market demand for cars and construction of new buildings
- Wood: from furniture and fencing
- Transport: fall in demand for commuting led to steep decline in demand for public transport
- Minerals: cobalt and lithium demand has surged as production of electric vehicles have grown.
Definition of joint demand
When the demand for one good is directly and positively related to market demand for a related good or service.
Two complements ?
- Said to be in joint demand and the cross-price elasticity of demand is negative
- the demand for two goods are interdependent.
Examples of joint demand
- Smartphone and apps
- Pasta and sauces
- Solar panels and batteries.
Definition of composite demand
Where goods have more than one use.
What does composite demand explain about the market ?
An increase in market demand for one product can lead to a fall in market supply of the other as resources are switched.
Examples of composite demand
- Milk: can be used for cheese, yoghurt, cream, butter
- Land: farmland, urban land (commercial and residential property building)
- Corn: food for human consumption, a freed grain for livestock, a raw material making ethanol and corn syrup.
Definition of marginal utility
the change in total utility from consuming one more good.
Definition of diminishing marginal utility
A person receiving less satisfaction and benefit as they consume more of one good.
Factors that impact demand
- Income
- Tastes and fashion
- Advertising
- Population
- Price of complements.
How does income affect demand ?
If income increases, more basket of goods become affordable which increases demand.
How does tastes and fashion affect demand ?
If a brand becomes more fashionable, demand will increase.
How advertising affect demand ?
If the advertising campaign is successful, consumers will be more willing to purchase more the good.
How does population affect demand ?
If the population structure of a country were to change, so would the demand for certain goods (e.g. with an ageing population, the UK economy will be demanding more products to suit that age group).
How does the price of complements affect demand ?
If the price of a good falls, the demand for the complement will increase.
