PM P1: Demand Theory

What is Demand?

The amount that consumers are willing and able to purchase at each given price over a given period of time.

What is Effective Demand?

Demand supported by the ability to pay (willingness + ability).

What is the Law of Demand?

The quantity demanded of a good/service is inversely related to its price, ceteris paribus. -> Downward sloping individual and market demand curves.

What is the Law of Diminishing Marginal Utility (LDMU)?

Beyond a certain point of consumption, each extra unit consumed gives less additional utility than previous units.

What is the Marginalist Principle? (Consumer Decision)

Rational consumer maximises total utility by purchasing units up to MU=P.

Why does Law of Demand occur? (Substitution Effect)

Change in P_good -> consumers switch to/from alternative products due to change in relative price.

Why does Law of Demand occur? (Income Effect)

Change in P_good -> affects consumers' real income/purchasing power -> affects ability to buy.

What is a Movement along the Demand Curve?

Changes in quantity demanded arising from a change in the price of the good itself, ceteris paribus.

What is a Shift of the Demand Curve?

Changes in non-price determinants of demand, assuming no change in the price of the good itself.

What is a Change in Quantity Demanded?

A movement along the demand curve.

What is a Change in Demand?

A shift of the demand curve.

What are Non-Price Determinants of Demand? (Factors shifting DD curve)

Factors that shift the market demand curve.

What are Tastes and Preferences? (Non-Price DD Factor)

Influenced by ads, education, culture, age. Change in taste for good -> DD curve shifts.

What are Income Levels? (Non-Price DD Factor)

Affects consumers' ability to purchase goods/services.

What is a Normal Good?

Demand ↑ as consumer income ↑ (DD shifts right). Most goods are normal goods.

What is an Inferior Good?

Demand ↓ as consumer income ↑ (DD shifts left). Often cheap substitutes for better quality goods.

What is Direct Tax Policy? (Non-Price DD Factor)

Increase in direct tax rate -> reduces disposable income -> ↓ ability to pay -> DD normal goods ↓.

What is Direct Subsidy Policy? (Non-Price DD Factor)

Payments made by government to consumers -> ↑ ability to pay -> DD ↑.

What are Expectations of Future Prices? (Non-Price DD Factor)

Consumers expect P ↑ in future -> DD now ↑ (rightward shift). Consumers expect P ↓ in future -> DD now ↓ (leftward shift).

What are Related Goods? (Non-Price DD Factor)

Substitutes or Complements.

What is a Substitute? (Related Good)

Commodity used in place of another (competitive demand). Psubstitute ↑ -> DDgood ↑.

What is a Complement? (Related Good)

Good used in conjunction with another (joint demand). Pcomplement ↓ -> DDgood ↑.

What is Derived Demand? (Non-Price DD Factor)

Demand for one good/service that occurs as a result of the demand for another intermediate/final good or service (e.g., labour for final goods).

What is Population Size or Structure? (Non-Price DD Factor)

Changes in absolute population or demographics -> affects number of potential consumers.

What are Interest Rates? (Non-Price DD Factor)

Price of borrowing money. Interest rates ↑ -> cost of purchase for loan-reliant goods ↑ -> DD for those goods ↓.

What are Exchange Rates? (Non-Price DD Factor)

S$ appreciates -> Singapore exports more expensive in foreign currency -> foreign DD for Singapore exports ↓.