2.2 Demand

Demand definition.

The quantity consumers are willing and able to buy at each price, over a given period of time.

For demand, what goes on the x and y axis?

x - quantity demanded (units + time period if you have)

y - price (£)

For demand, what do you label the curve?

D / D1, D2, D3

What is the Law of Demand?

As the price of a good rises, the quantity demanded falls, ceteris paribus.

Why does the demand curve slope down?

Diminishing Marginal Utility.

Explain why the demand curve slopes down.

Each extra unit consumed gives less additional satisfaction than the one before. A consumer will only buy another unit while the satisfaction it gives is worth atleast the price. So later units are only worth buying at a lower price.

What is the income effect?

A fall in price raises real income, so the consumer can afford to buy more.

What is the substitution effect?

A fall in price makes the good cheaper relative to alternatives, so consumers switch towards it.

What is a movement along a demand curve cause by?

A change in price of the good itself, and by nothing else.

What is an extension of demand?

• price of good falls

• quantity demanded rises

• move down the curve

• quantity demanded extends

What is a contraction of demand?

• price of the good rises

• quantity demanded falls

• move up the curve

• quantity demanded contracts

For a movement, do you say quantity demanded or demand changes?

Quantity demanded.

For a shift, do you say quantity demanded or demand changes?

Demand.

Effective demand definition.

Demand backed by the ability to pay. Must be willing, but also able.

What is a demand curve?

A line showing the quantity demanded at each price.

Shift of the demand curve definition.

When the whole curve moves left or right because a condition of demand has changed. Price of the good is unchanged.

Conditions of demand definition.

The factors other than the good’s price that determine demand.

What is a normal good? (+ example)

A good for which demand rises as income rises.

• restaurant meal

What is an inferior good? (+ example)

A good for which demand falls as income rises.

• supermarket value ranges

What is the rule for shifts of the curve: the conditions of demand?

A shift is caused by a change in anything other than the price of the good itself.

Ceteris Paribus has been broken.

What are the conditions of demand?

• Population

• Advertising

• Substitute’s price

• Income

• Fashion and tastes

• Interest rates

• Complement’s price

• Expectations

Explain the condition of demand income.

Higher income raises demand for normal goods and lowers demand for inferior goods.

Explain the condition of demand price of substitutes.

If a substitute becomes more expensive, demand for this good rises.

Explain the condition of demand price of complements.

If a complement becomes more expensive, demand for this good falls.

Explain the condition of demand fashion and tastes.

If the good becomes more fashionable or is shown to be healthier, demand rises.

Explain the condition of demand population.

More consumers, or change in the age structure, changes demand for particular goods.

Explain the condition of demand expectations.

If consumers expect prices to rise soon, demand rises now. (also applies to expected income)

Explain the condition of demand interest rates.

Higher rates makes borrowing dearer and saving more attractive, cutting demand for goods bough on credit.