Demand

Demand

The quantity of a good/service that consumers are willing and able to buy at a given price, at a particular time.

Demand curve

Typically slopes downwards - shows the relationship between price and quantity demanded

Factors causing a shift in demand

• Changes in tastes and fashion

• Changes to people’s income. If real income increases:

  • Demand for normal goods will increase

  • Demand for inferior goods will decrease

Substitute goods

Goods which are alternatives to each other. An increase in the price of one good will decrease its demand and increase the demand for its substitutes (‘competitive demand’)

Complementary goods

Goods that are often used together so are in joint demand. The increase in the price of one good will cause the demand for both to decrease.

Derived demand

Demand for a good or a factor of production used in making another good or service

Composite demand

Demand for goods which have more than one use

Price elasticity of demand (PED)

A measure of how the quantity demanded of a good responds to a change in its price

Formula for PED

% change in quantity demanded/ % change in price

Elastic Demand

PED > 1

A % change in price will cause a larger % change in quantity demanded

Inelastic Demand

0 < PED < 1

A % change in price will cause a smaller % change in quantity demanded.

Unit Elasticity of Demand

PED = +-1

The size of the % change in price is equal to the size of the % change in quantity demanded.

Income Elasticity of Demand (YED)

How much the demand for a good changes with a change in real income.

Formula for YED

% change in quantity demanded/ % change in real income

Cross Elasticity of Demand (XED)

A measure of how the quantity demanded of one good responds to a change in the price of another good.

Formula for XED

% change in quantity demanded of Good A/ % change in price of Good B

XED for substitutes

The XED for substitute goods will be positive

XED for complements

The XED for complementary goods will be negative.

Factors influencing PED

• Substitutes

• Type of good/service

• % of income spent on good

• Time

YED for normal goods

Normal goods have a positive YED (0 < YED < 1)

YED for inferior goods

Inferior goods have a negative YED (YED < 0)