2.1 Determinants of Demand for goods/services

What is a market?

A market is a voluntary meeting of buyers and sellers.

A market is highly competitive when there are a large number of buyers and sellers passively accepting the set ruling market price

Competitive markets also exhibits a high degree of transparency

Intro to Demand

Demand is the amount of a good/service that a consumer is willing and able to purchase at a given price in a given time period

-Effective demand is the desire for a good or service backed by an ability to pay.

Market and Individual Demand

• Market Demand is the quantity of a good/service that all consumers in a market are willing and able to buy (combination of all the individual demand)

• Individual demand is the quantity that a particular individual would like to buy

Law of demand 

States that there is an inverse relationship between price and quantity demanded, ceteris paribus 

• When prices rise, QD falls 

• When price falls, QD rises 

Market Demand curve 

Market Along curve 

Conditions of Demand

• Prices of substitute goods or goods in competing demand 

• Prices of goods in joint demands or complementary goods 

• changes in real income 

• changes in taste/preferences 

• changes in the number of consumers 

• Future price expectations 

• These factors cause a shift of the demand curve

Normal Goods and Inferior Goods

Normal Goods: Normal goods have a positive relationship with income, as income rises, demand rises and vice versa 

Inferior Goods: Have an inverse relationship with income, as income rises, demand falls and vice versa 

Changes to the conditions of demand

→

Changes in real income

Real income determines how many goods and services can be produced by consumers. It is dependent on the goods as explained above

-Income increases: Demand increases, shifts right, D2→D1

-Income decreases: Demand decreases, shift left, D2→D1

Changes in taste 

If goods are more desirable, then demand will increase, direct relationships between taste and demand. Advertising can change these tastes

-More preferable: Demand increases and shifts right 

-Less preferable: Demand decreases and shifts left  

Changes in the price of substitutes 

Direct relationships between the price of good A and the demand for good B

-Price of Good A increases: Demand for Good B increases, shifts right

-Price of Good A decreases: Demand for Good B decreases, Shifts left

Changes in the price of complementary goods

There is an inverse relationship between the price of good A and demand for good B, e.g. Price of printer ink increases so the demand for printers decreases

-Price of Good A increases: Demand for Good B decreases and shifts left

-Price of Good A decreases: Demand for Good B increases and shifts right 

Changes in the number of consumers

If population size changes, then the demand for goods/services will also change. Direct relationship between changes in population size and demand. Demand will also change if there is a change to the age distribution, as different ages demand different goods and services e.g. elderly depend on hearing aids

population increase

demand increases and shift right

population decrease

demand decreases and shifts left

Future Price Expectations

If consumers expect price rises, they will purchase goods now and demand will increase. If consumers expect price falls, they will wait to purchase it later, and demand will decrease

Expecting price rises 

Demand increases and shifts right 

Expecting price falls

demand decreases and shifts left