Demand

Demand

When you demand something, it means you're willing and able to buy it

Demand curve

Shows the relationship between the price and quantity demanded of a good or service.

Contraction in demand

When an increase in price leads to a decrease in quantity demanded

Extension in demand

When a decrease in price leads to an increase in quantity demanded

Price elasticity of demand (PED)

PED measures how much quantity demanded changes in response to a change in price PED = %△Qd/ %△P

Elastic demand

When PED is between 1 and ∞. Demand is very responsive to changes in price.

Inelastic demand

When PED is between 1 and 0. Demand is unresponsive to changes in price.

Unitary elastic demand

When PED = 1

Elastic demand curve

Gentle, flatter slope because a small change along the price axis leads to a larger % change along the quantity axis.

Inelastic demand curve

Steeper slope because a large change along the price axis leads to a smaller % change along the quantity axis.

Unitary elastic demand curve

Remember: it looks like the beginning of a "U", for unitary elastic demand.

Perfectly inelastic demand curve

Remember: it looks like an "i" for perfectly inelastic demand.

Perfectly elastic demand curve

Perfectly inelastic demand

When PED = 0. Demand will not respond at all to a change in price.

\
E.g. life-saving medicine

Perfectly elastic demand

When PED = ∞. Demand will be infinitely responsive to a change in price.

The factors which affect PED

**NASBIT**

**N**ecessity or luxury

**A**ddictive or habit-forming

**S**ubstitutes

**B**rand loyalty

Proportion of **I**ncome

**T**ime

Elastic demand and total revenue

If price **increases**, quantity demanded will **decrease** by a larger %, so overall total revenue will **decrease**.

\
If price **decreases**, quantity demanded will **increase** by a larger %, so overall total revenue will **increase**.

Inelastic demand and total revenue

If price **increases**, quantity demanded will **decrease** but by a smaller %, so overall total revenue will **increase**.

\
If price **decreases**, quantity demanded will **increase** but by a smaller %, so overall total revenue will **decrease**

Unitary elastic demand and total revenue

Whether price increases **or** decreases, total revenue will **not change** at all

Changes in income (effects on demand)

For **normal** goods (e.g. Ben & Jerry’s ice cream) demand will **increase** when incomes **rise**, and demand will **decrease** when incomes **fall**.

\
For **inferior** goods (e.g. Sainsbury’s Basics ice cream) demand will **increase** when incomes **fall**, and demand will **decrease** when incomes **rise**. 

Price of other goods

For substitute goods (e.g. iPhones and Samsungs) demand for the first good (iPhone) will decrease when price of second good (Samsung) falls, and demand for the first good (iPhone) will increase when price of second good (Samsung) rises.

For complementary goods (e.g. iPhones and iPhone apps) demand for the first good (iPhone) will increase when price of second good (iPhone apps) falls, and demand for the first good (iPhone) will decrease when price of second good (iPhone apps) rises.

Income elasticity of demand (YED)

YED measures how much quantity demanded will change in response to a change in income.

YED = %△Qd/%△Y

Normal goods

For normal goods (e.g. Ben & Jerry’s ice cream), demand **increases** when income **increases**, which means the YED for normal goods is **positive (0 - 1)**.

Inferior goods

For inferior goods (e.g. Sainsbury’s basics ice cream), demand **increases** when income **decreases**, which means the YED for inferior goods is **negative. 0 to -∞**

Income elastic goods (or luxury goods)

When YED is between **1** and **∞**. Income elastic goods are very responsive to changes in income and are likely to be luxury goods e.g. a rolex  

Income inelastic goods (or necessity goods)

When YED is between **-1** and **1**. Income inelastic goods are unresponsive to changes in income, and are likely to be necessity goods e.g. bread

Cross elasticity of demand (XED)

XED measures how much quantity demanded of good A changes in response to a change in price of good B

XED formula = % change in quantity demanded (Qd) of A / the % in price (P) of B 

Complements (or complementary goods)

Complements are goods which are used and bought together (e.g. iPhones and iPhone apps)

For complements, if the price of good B (iPhone apps) **increases** then demand for good A (iPhones) **decreases**.

XED will be **negative**.

Substitutes (or substitute goods)

Substitutes are goods which can replace one another (e.g. iPhones and Samsungs)

For substitutes, if the price of good B (Samsungs) **increases** then demand for good A (iPhones) **increases**.

XED will be **positive**.

Unrelated goods

Unrelated goods are goods which have nothing to do with each other (e.g. cacti and hover boards) XED = 0 for unrelated goods