1.2.2 Demand (Micro)

INDIVIDUAL AND MARKET DEMAND

Market demand – consists of the sum of all individual demand schedules
in the market. Represented by a demand curve

• The demand curve slopes downwards indicating the inverse relationship between price and demand.

• At higher prices, consumers generally willing to purchase less than at lower prices

• As price falls, demand rises -this is called an expansion in demand

• As price rises, demand falls -this is called a contraction in demand

EXPLAINING DOWNWARD-SLOPING DEMAND CURVE

• Income Effect: When prices fall, consumers' real income (purchasing power) increases, allowing them to buy more goods with the same amount of money.

• Substitution Effect: If a good's price drops, it becomes cheaper relative to competitors, prompting consumers to substitute it for more expensive alternatives.

• Law of Diminishing Marginal Utility: Consumers receive less satisfaction (utility) from each additional unit consumed. Consequently, they are only willing to buy more units if the price is lower.

MARGINAL UTILITY THEORY

• Marginal utility theory examines the increase in satisfaction consumers gain from consuming an extra unit of a good.

• Utility is an idea that people get a certain level of satisfaction/happiness/utility from consuming goods and service.

UTILITY AND PRICE

Utility: the satisfaction or benefit a consumer gains from consuming a good or service.

Price: the amount of money consumers must pay to purchase a good or service.

EXPLAINING DOWNWARD-SLOPING DEMAND CURVE (exceptions to Law of Demand)

1. THE SNOB EFFECT-

Sometimes, people may value a good more highly simply because its price is high, especially if they know that other people will observe them consuming these expensive goods.  We call this conspicuous consumption. If a good is more expensive it may be seen as more desirable and better quality, thus making it more likely for people to purchase

 

2. SPECULATICE DEMAND-

The demand for a product can also be affected by speculative demand. Here, potential buyers are interested not just in the satisfaction they may get from consuming the product, but also the potential rise in market price leading to a profit. When prices are rising, speculative demand may grow, adding to the upward pressure on prices. People are more likely to buy gifts in hopes that it will gain more value and the cost will keep increasing.

An example of this is bitcoin.

 

3. GIFFEN GOODS (Inferior Good)-

Is an inferior good which people consume more of as price rises. A Giffen good is an inferior good (quantity demanded as income increases) which people consume more of as price rises. 

The classic example given by Marshall is of inferior quality staple foods, whose demand is driven by poverty that makes their purchasers unable to afford superior foodstuffs.   As the price of the cheap staple rises, they can no longer afford to supplement their diet with better foods, and must consume more of the staple food.