Theory of demand Flashcards
Define demand
- willingness and ability (purchasing power)
- to buy particular good
- per period of time
- a.k.a Effective demand
Define quantity demanded
- specific amt of good & price
- consumers willing and able to buy
- over period of time
Law of demand
- inverse relationship
- higher price of good
- lower quantity demanded of the good
- ceteris paribus
2 reasons for the inverse relationship (Law of demand)
- Income effect
2. Substitute effect
Income effect
- when price rise
- income remains same
- feel poorer, cannot afford to buy as much
- quantity demanded falls
Substitute effect
- when price rise
- ppl switch to cheaper alternatives
- quantity demanded falls
2 ways to illustrate law of demand
- Demand schedule
2. Demand curve (downsloping)
Individual demand schedule
- amt of a good a consumer (*) are able and willing to buy
- specific price
- over a period of time
Market demand schedule
- aggregate of all individual schedules for a good
- obtained by horizontal summation
- shows total quantity of a good demanded
- by all consumers @ specific price, ceteris paribus
Changes in quantity demanded
- change in amt of good
- ppl willing and able to buy
- due to change in price of good
- increase/decrease lead to movement along curve
Change in demand
- change in non-price determinants
- increase/decrease lead to shift in graph
Non-price determinants (NPD)
- Income
- Price of related goods
- Consumers’ expectations
- Taste and preferences
- Population size and demographic structure
Income (NPD)
- effect of a change in income depends on type of good
- normal good vs inferior good
Normal good (income)
- demand varies positively with income
- income rise, demand for normal good rises
- e.g. smartphones, restaurant food
Inferior good (income)
- demand varies inversely with income
- income rise, demand for inferior good falls
- e.g. basic features smartphones, instant cup noodles
Price of related good (NPD)
- substitutes
- complements
Substitutes (Price of related good)
- competitive goods
- satisfy the same want
- e.g. Adidas & NIke Shoes
- an increase in price of one leads to an increase in demand for the other
Complements (Price of related goods)
- joint demand, bought tgt to satisfy a particular want
- e.g. badminton rackets and shuttlecock
- increase in price of one leads to fall in demand for the other
Consumers’ expectations
- future incomes
- future price of good
Expectation of price hike (consumers’ expectation)
- expect rise in price
- bring forward consumption, increase spending now
- e.g. Japan: when GST hike was announced, many rushed to buy big ticket items before Oct 2019
Expectation of income increase (NPD)
- expect greater purchasing power
- increase in demand for some gds and svs
Tastes and preferences (NPD)
- when a good becomes fashionable, demand for it rises , curve shifts
- e.g. Ryan Loche lied abt being robbed at Rio de Janerio, commercial sponsors’ reputation affected
Population size
- population size increase, no. of consumers increase, ceteris paribus
- market demand for gds and svs increase
Demographic structure
- more elderly, more demand for healthcare and nursing related gds and svs
- baby boom- more demand for baby products
