Demand Flashcards
Demand
-Demand is the quantity of a G/S that consumers are able and willing to buy at a given price during a given period of time.
-Demand varies with price. Generally, the lower the price, the more affordable the good and so consumer demand increases.
Movements along the demand curve
-At price P1, a quantity of Q1 is demanded. At the lower price of P2, a larger quantity of Q2 is demanded. This is an expansion of demand. At the higher price P3, a lower quantity of Q3 is demanded. This is a contraction of demand. Only changes in price will cause these movements along the demand curve.
Shifting the demand curve
-Price changes don’t shift the demand curve. A shift from D1 to D2 is an inward shift in demand, so a lower quantity of goods is demanded at the market price of P1. A shift from D1 to D3 is an outward shift in demand. More goods are demanded at the market price of P1.
Factors that shift the demand curve: PIRATES
Population- larger the population, the higher the demand. Changing the structure of the population also affects demand, such as the distribution of different age groups.
Income- If consumers have more disposable income, they are able to afford more goods, so demand increases.
Related goods- related goods are substitutes or complements. A substitute can replace another good, such as two different brands of TV. If the price of the substitute falls, the quantity demanded of the original good will fall because consumers switch to cheaper option. A complement goes with another good, eg strawberries and cream. If the price of strawberries increases, the demand for cream falls because fewer people will be buying strawberries.
Advertising- increases consumer loyalty to the good and increase demand.
Tastes and fashions-the demand curve will also shift if consumer tastes change. Eg demand for physical books might fall if consumers start preferring to read e-books.
Expectations- This is of future price changes. If speculators expect the price of shares in a company to increase in the future, demand is likely to increase in the present.
Seasons- Demand changes according to season. For example demand for suncream in the summer.
Types of demand
Derived demand-When demand for one good is linked to the demand for a related good. Eg demand for bricks is derived from the demand for the building of new houses. The demand for labour is derived from the goods the labour produces.
Composite demand-When good demanded has more than one use. An example could be milk. Assuming there is a fixed supply of milk, an increase in the demand for cheese will mean that more cheese is supplied, and therefore less butter can be supplied.
-Joint demand- this is when goods are bought together, eg camera and memory card
Diminishing marginal utility
-demand curve is downward sloping, showing the inverse relationship between price and quantity.
-The law of diminishing marginal utility states that as an extra unit of the good is consumed, the marginal utility ie the benefit derived from consuming the good, falls. Therefore, consumers are willing to pay less for the good.
