1.2.2 Demand

The basic law of demand

Price and quantity have an inverse relationship

The law of diminishing marginal utility

as one consumes additional units of a good or service, the marginal utility derived from consumption will fall. This principle explains the downward sloping demand curve.

Determinants of demand

PIRATES

P

Population change - if more consumers enter a market for a product, demand can shift outwards at all prices for said product.

I

Income effect - as incomes rise, consumers can afford more products at every price, entire demand curve shifts right. NB: curve for normal and luxury goods shifts right, whereas curve for inferior goods shifts left.

R

Related goods -

Substitutes: demand for product X will go up when price of substitute product Y goes up.

Complements: demand for product A will go up when price of complement product B falls (the use of one product increases the use of its complement).

A

Advertising effect - effective advertisement can generate additional demand for a product.

T

Tastes/changes in consumer preferences - New products or tastes emerging can shift demand LEFT OR RIGHT

E

Expectations -

If the price of product X is expected to increase in the future then demand for that product will shift right.

If product Y is believed to become outdated or undesirable in the future, the demand for Y will shift left.

S

Seasonality - some products are highly seasonal causing shifts left or right at different times of the year or due to special occasions.

Normal vs Inferior goods

NORMAL - A good for which the quantity demanded rises as consumer incomes rise (price remaining equal)

INFERIOR - A good that decreases in demand as consumer incomes rise 

Joint demand

A very strong complementary demand where products must be consumed together: e.g. ink cartridges with printers.