Demand

Demand Is the number of units of a product which consumers are willing to buy at any given market price at any given time. A demand schedule Is a table showing the number of units of a good that is demanded by a consumer at different prices. Price 30c 20c 10c Anns demand 100 200 300

Demand curve Is a graph showing the number of units of a good that is demanded at any given market price.

The demand curve for a normal good slopes downward because;

As the price of a good falls the consumer buys more of this cheaper good, because the marginal utility per cent spent on this good increases and the consumer aims to maximise their total utility.

Individual Demand Is the quantity of a good an individual is willing to buy at different prices. Market (aggregate) demand Is the total quantity of a good that all consumers are willing to buy at different prices. Price Example of a supply schedule (table) Anns demand Johns demand Market demand schedule

1 2 3 To derive the market demand, add the quantity demanded by each individual consumer at each price to calculate the overall quantity demanded by the market at each price. To derive the three demand curves (graphs) plot the three sets of points from the demand schedules (tables). Note the demand curves (graphs) are downward sloping, which means that as price increases so quantity demanded decreases.

Factors that influence demand

The factors, which influence a consumer's demand schedule are summarized as: P, Pog, Y, T, U, E, G 1. The price of other goods (Pog) If the price petrol increases then the price of its complementary good (a good
that is purchased with another good in order to satisfy a need or want. The purchase of two complementary goods is usually regarded as one transaction.) a large car will

decrease. If the price butter increases then the demand for its substitute (a good that can be used instead of another good to satisfy a need or want.) margarine will increase. 2. The income of the consumer (Y) For most goods as income rises the demand rises as consumers can afford more, and when income falls demand falls as consumers cannot afford to buy as much. Eg. when incomes rise there will be more demand for mobile phones, houses, cars. Eg. when income falls there will be less demand for mobile phones,houses and cars. 3. The consumers' tastes or preference for a commodity (good) When a commodity comes into fashion or into season there is an increase in the quantity demanded at each price. Eg. The demand for postal services fell when people began using texting and e-mails. Advertising attempts to influence taste in favour of the good in order to increase demand. 4. Unplanned factors If there was a sudden heatwave this may result in an increase in the demand for suncream / ice cream etc. 5. The expectations concerning future prices, availability of income (T) If a consumer expects that future prices are likely to be greater than they are at present, then there will be an increase in the demand for the good at each price.

 Eg. The demand for houses rose during the property bubble of the naughtiesas investors thought that prices would continue to rise. However if consumers expects that future prices are likely to be less than they are at present (deflation), then demand will fall as they will wait to buy the good at a cheaper price sometime in the future. Eg. After the bubble burst in 2008 the demand for houses fell as investors waited to buy them at a cheaper price. 6. Government regulations If the government starts a programme to curtail (limit) consumption of a particular product then it may affect the demand for a good. Eg. a health education campaign to curtail cigarette consumption.

Movement along the demand curve

A price change will cause a movement along the demand curve. A price increase from P 1 to P 2 will cause demand to fall to Q2. A price reduction from P 1 to P 3 will cause demand to increase to Q3.

Shifts in the demand curve

All factors other than a change in the price of the good itself will cause a shift in the demand curve.

Factors that increase demand will cause a shift to the right. Factors that decrease demand will cause a shift to the left. In both cases, quantity supplied will change, but price will remain unchanged.

Causes of shifts to the right Price remains the same but demand increases

Causes of shifts to the left Price remains the same but demand decreases

1. Consumers incomes increase. With higher incomes people can now afford to buy more of this good. 2. Change in Consumer Taste As a good becomes more fashionable more will be bought. Advertising also influences consumer taste. 3. Unplanned events Good weather will increase the demand for sun cream. 4. The price of an alternative good/service goes up The demand for this god will increase. 5. The prices of Complimentary goods decrease. Then the demand for this good will increase. 6. Technological advances. With improvements in technology, manufacturers are now offering newer models with advanced features, thereby attracting new

1. Consumers income decrease. With lower incomes people can now less so demand goes down. 2. Change in Consumer Taste As a good goes out of fashion less will be bought. Bad publicity also influences consumer taste. 3. Unplanned events Bad weather will decrease the demand for sun cream. 4. The price of an alternative good/service goes down The demand for this god will decrease. 5. The prices of Complimentary goods increase. Then the demand for this good will decrease.

consumers and existing customers to upgrade. Eg. mobile phones. I-pods etc.
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Sample Question OL2008 Q 2

The Law of Demand? States that an increase in price leads to a decrease in quantity demanded, or a decrease in price leads to an increase in quantity demanded. Example: If price of a bar chocolate increased by 5c per bar then quantity demanded or purchased would fall. This is why normal goods face a downward facing demand curve. Exceptions to the Law of Demand? 1. Giffen Goods For certain necessities a rise in price causes an increase in quantity demanded while a fall in price causes a fall in quantity demanded. Goods of lower quality make up a large part of the spending of low income families. As the price falls, real incomes increase and families buy less of these goods and purchase more of better quality goods. As the price rises they have less income to spend on other types of goods so they tend to increase their demand for these goods. E.g. bread/rice. 2. Status Symbols / Snob items / Ostentatious Goods / Goods of Conspicuous Consumption Some commodities by their exclusiveness or expensiveness are attractive to some buyers. A rise in price makes them more exclusive, and therefore, more attractive to those with the incomes to purchase them. A fall in price may lead to a fall in quantity demanded as they may no longer appear as exclusive to the rich and are still outside the price range of the poor.

3. Goods the purchase of which is influenced by expectations as to future prices / Speculative goods If prospective buyers think that prices are likely to be even higher in the future, the current level of demand may not fall even if prices increase e.g. if a person is considering buying a house the possibility that prices are likely to be even higher in the future will probably stimulate demand at current prices.

4. Goods of Addiction In the case of those goods to which a person becomes addicted e.g. drugs, they no longer act rationally. They become so addicted to the drug that in order to get the same 'buzz' from consumption of the drug, demand for the commodity may increase, even when the price of the commodity increases.

Types of goods
Normal good Is a good that obeys the law of demand. If price increases then the quantity demanded decreases, and if price decreases then quantity demanded increases (opposite direction). If income increases then the quantity demanded increases and if income decreases then quantity demanded decreases (same direction). Eg. A foreign holiday. Inferior good Is also a normal good as it obeys the law of demand. If price increases then the quantity demanded decreases, and if price decreases then quantity demanded increases (opposite direction). However it is a good that you buy because you cannot afford a better alternative. If income increases then the quantity demanded decreases, and if income decreases then quantity demanded increases (opposite direction). Eg. Cheap cuts of meat eg. Mince. Giffen good Is an inferior good that is consumed by people on very low incomes and a large part of that income is spent on the good. Eg. A low income family may consume pasta 6 days a week (as it is a very cheap and filling food) and may have meat once a week. If the price of pasta increases then they will not be able to afford the meat and will have to consume pasta on the 7th day as well. Therefore it does not obey the law of demand. If price increases then the quantity demanded increases, and if price decreases then quantity demanded decreases (same direction).

If income increases then the quantity demanded decreases, and if income decreases then quantity demanded increases. Eg. Pasta, rice, bread (opposite direction). Note: after the financial crisis of 2008 when incomes in many households dropped the consumption of bread increased. Many people who previously dined out for lunch started to bring a packed lunch to work instead. Substitution Effects & Income Effects

If the price of a good falls, two things happen: 1. Substitution Effect The good becomes cheaper relative to other goods. The substitution effect will always result in more of a relatively cheaper product being demanded whether it is a normal, inferior or giffen good. 2. Income Effect The real income of the consumer is increased. Therefore the consumer has more spending power and can get more for the same money. However the income effect can work in two ways. If the good is normal then the consumer will buy more due to increased spending power. If the good is inferior or giffen then the increase in spending power will cause the consumer to buy a more superior product and less of the inferior product. The income effect for a giffen good is much stronger than for an inferior good due to the large portion of income that is spent on the giffen good. The overall effect of a price reduction is summarized below. Substitution Effect + Income Effect = Price Effect Substitution Effect Income Effect Price Effect Normal Good *Positive *Positive Quantity demanded Demand increases as the Demand increases as increases good is relatively real income rises. Because both effects are cheaper. positive Inferior Good *Positive *Negative Quantity demanded Demand increases as the Demand declines as increases good is relatively real income rises. Because the positive cheaper. substitution effect is stronger than the negative income effect. Giffen Good *Positive *Negative Quantity demanded Demand increases as the Demand declines as decreases good is relatively real income rises. Because the negative cheaper. income effect is stronger than the positive

substitution effect because a large proportion of income is spent on giffen goods. . *Positive meaning that more is demanded *Negative meaning that less is demanded.

A consumer spends all income on two goods, Good A and Good B. Both goods are normal goods but they are not complementary goods. The price of Good A is reduced and the price of Good B remains unchanged. The consumer continues to spend all income on the two goods. Distinguish between the substitution effect and the income effect of the price reduction in Good A.