Econs: Theory Of Demand

Define Demand

Demand is defined as the quantity of a good or service that consumers are both willing and able to buy at each possible price in a given period of time, ceteris paribus.

What is ceteris paribus?

Refers to the assumption that every other variable that affects the demand of a good or service remains constant.

Define Quantity Demanded

Refers to a particular quantity that the consumer is willing and able to buy at a particular price, as reflected by a point on a given demand curve.

Define Demand (in comparison to quantity demanded)

Demand refers to quantity demanded AT EVERY PRICE, where the relationship between the price and quantity demanded is represented by the entire demand curve.

Define The Law Of Demand

The Law Of Demand states that in a given time period, the quantity demanded of a product is inversely related to its price, ceteris paribus.

• The higher the price of a good or service, ceteris paribus, the less willing and able consumers are to buy the good or service, hence the smaller the quantity demanded of it.

Define Utility

It is the satisfaction (benefit) that people get from consuming a good or service.

Define Marginal Utility

It is the additional satisfaction that consumers derive from consuming an additional unit of good.

Define The Law Of Diminishing Marginal Utility

LMDU states that beyond a certain point of consumption, as more and more units of a good or service are consumed, the additional utility derived from each additonal unit consumed will fall.

Define Market Demand

It is the sum of the individual demand schedules of all consumers in the market

What causes a change in demand & how is it represented on the demand curve?

Changes in non-price determinants; represented by a shift of the demand curve

• An increase in demand would cause an increase in quantity at each and every price (curve shifts to the right)

What causes a change in quantity demanded and how is it represented on the demand curve?

Changes in price; represented by a movement along the demand curve.

• Fall in price leads to increase in quantity demanded (downward movement)

• Rise in price leads to decrease in quantity demanded (upward movement)

What are the 8 non-price determinants of demand? (EGYPTS)

• Expectations of prices and income & Ease of borrowing

• Government policies

• (Y) Income (Inferior and normal goods based on Income Elasticity of Demand)

• Price of related goods (Substitute & Complementary goods) + Population Size

• Tastes & Preferences

• Seasonal Factors

How Do Consumer’s Expectations Affect Their Spending?

Consumers’ expectations of the future will affect their decision to purchase now.

• If they expect the price of a good to rise in the future, they will buy more now, raising the demand for the good (demand curve shifts to the right)

• If they expect the price of a good to fall in the future, they will postpone their purchases now, reducing current demand for it.

How Does Ease Of Borrowing Act As A Price Determinant?

When banks are more willing to lend consumers money, consumers will have the ability to spend beyond their income, allowing them to consume more.

How Do Government Policies Act As Non-Price Determinants?

They can influence consumer tastes and preferences favourably/unfavourably

How Does Income Act As A Non-Price Determinant?

Ability of a consumer to buy goods or services depends on the consumer’s income, which may change based on the level of economic activity (E.g. during an economic boom or recession, changes in disposable income can occur)

How Does Price Of Related Good Act As A Non-Price Determinant?

Substitutes and Complementary Goods affect the price of related goods

What Are Substitutes In Consumption? (Price of related goods)

They are the goods that can be used in place of one another for the satisfaction of a particular purpose/want (i.e. goods that are alternatives of one another)

What Are Complements In Consumption/Goods In Joint Demand?

They are Goods used in conjunction with one another in the satisfaction of a particular purpose/want.

• e.g. xbox console and xbox games

What Is Derived Demand?

It is the demand for a factor of production that results in the demand for a final good.

• e.g. rise in demand for furniture causes a rise in demand for raw materials like wood and labour to make the furniture

How Does Consumers’ Tastes & Preferences Act As A Non-Price Determinant?

Tastes and preferences can be affected by peers, advertisements, pop-star appeal, changes in prevailing fashions and trends, and even weather conditions.

Changes in consumer tastes in favour of/away from a particular good or service will raise/reduce its demand.

How Do Consumers’ Expectations Act As A Non-Price Determinant?

Affects their decision to purchase now

• If they expect price of good to rise in the future, they will buy more now, raising demand for the good in the present (demand curve shifts to the right)

How Does Ease Of Borrowing Act As A Non-Price Determinant?

Allows for consumers to have a greater ability to consume as availability of loans affects the demand for goods and services.

Scenarios:

• Banks granting more loans applications —> more able to consumer beyond their income

• Fall in interest rates; reducing cost of borrowing —> greater incentive to buy things on credit

How Does Size & Composition Of Population Act As A Non-Price Determinant?

• Increase in the size of the population increases the number of consumers in the market, increasing demand for goods and services.

• Changes in composition or structure of the population; more elderly, more amenities used by this age group

How Does Seasonal Factors Act As A Non-Price Determinant?

• Influences the demand for clothing, food, healthcare and travel

  • During winter, demand for winter clothing increases

  • During school holidays, the demand for air travel increases

How Do Government Policies Act As A Non-Price Determinant

• Influence consumers’ tastes and preferences

  • E.g. anti-smoking campaigns to effectively turn consumers away from smoking,decreasing demand for cigarettes

• Policies: Increase in income tax rates, reducing consumers’ disposable income and causing a decrease in demand for normal goods, while increasing demand for inferior goods.

• Laws; Banning E-cigarettes, restricts usage and thus causes drop in demand