Unit 2: Supply and Demand - Introduction to the Law of Demand

Overview of Markets and Demand

Definition of a Market: * A market is defined as a place where people who are willing and able to purchase a good, service, or resource can carry out an exchange with those who are willing and able to provide that same good, service, or resource. * While it may be a physical location, in Economic theory, a market is often not a physical place. * The transcript distinguishes between two specific market types: * Factor Market: Markets where the factors of production (land, labor, capital) are bought and sold. * Product Market: Markets where final goods and services are sold to consumers.
Defining Demand: * Demand is specifically the ABILITY and WILLINGNESS to purchase a quantity of a good or service at a certain price.
Initial Business Consideration: * If opening a business, such as one selling T-shirts, an entrepreneur must determine specific information regarding consumer demand and market conditions to succeed.

Types of Demand: Individual vs. Market

Individual Demand: This represents the demand of a single person for a specific product.
Market Demand: The sum of all individual demands for a product at every price point within the market.
Individual Demand Schedule (Sushi Example):

Price of Sushi (\text{\yen})	Quantity Demanded ( $Q_d$ )
$800$	$1$
$700$	$2$
$600$	$3$
$500$	$4$
$400$	$5$

Market Demand Schedule Calculation (Sushi Example):

Price of Sushi (\text{\yen})	$Q_d$ Consumer 1	$Q_d$ Consumer 2	Market Demand
$800$	$1$	$2$	$3$
$700$	$2$	$4$	$6$
$600$	$3$	$6$	$9$
$500$	$4$	$8$	$12$
$400$	$5$	$9$	$14$

The Law of Demand

Core Principle: There is an inverse relationship between the price of a good and the quantity demanded.
Definition: As the price of a good rises, the quantity demanded will usually fall, $ceteris\,paribus$ (all other things being equal), and vice versa.
Relationship Summary: * Higher Price = Lower Quantity Demanded ( $Q_d$ ). * Lower Price = Higher Quantity Demanded ( $Q_d$ ).

Changes to the Demand Curve: Movement vs. Shift

Change in Quantity Demanded ( $Q_d$ ): * This is caused only by a change in the price of the product itself. * On a graph, this results in a movement ALONG the existing demand curve. * Example: A price drop from \text{\euro}30 to \text{\euro}20 for soda increases quantity demanded along the curve.
Change in Demand: * This occurs when the entire demand curve shifts to the left or right. * It is caused by factors other than the price of the good itself, known as Non-Price Determinants of Demand. * Rightward Shift ( $D_1 \rightarrow D_2$ ): Indicates an increase in demand; more quantity is demanded at every price. * Leftward Shift ( $D_1 \rightarrow D_2$ ): Indicates a decrease in demand; less quantity is demanded at every price.

The 5 Non-Price Determinants (Shifters) of Demand

Income: * Normal Goods: Goods for which demand increases as consumer income increases (e.g., most standard products). * Inferior Goods: Goods for which demand decreases as income increases. These are usually lower-quality, less expensive goods (e.g., used cars in a high-income society). Consumers switch to higher-quality products as they get wealthier. * Consistency note: A good may be normal in a low-income market but inferior in a high-income market.
Price of Related Goods: * Substitutes: Two goods that satisfy the same need or want (e.g., Pepsi and Coca-Cola, coffee and tea). If the price of Good Y increases, the demand for Substitute Good X increases (shifts right). * Complements: Two goods typically used together (e.g., peanut butter and jelly, coffee and sugar). If the price of Good Y increases, the demand for Complement Good X decreases (shifts left).
Tastes and Preferences: * Influenced by fashion, trends, current events, promotion/advertising, or health considerations. * Example: A health campaign promoting kale and quinoa as high nutritional value foods shifts their demand curves to the right.
Number of Consumers: * As the size of the market or the number of consumers increases, the demand for most products rises. A decrease in population or consumer base shifts demand to the left.
Future Expectations: * Future Price: If consumers expect prices to rise in the near future, they buy more now (demand increases). If they expect prices to fall, they withhold purchases (demand decreases). * Future Economy: If consumers expect the economy to improve and their personal income/job security to increase, they may increase consumption now.

Practice: Demand for Tacos (A Normal Good)

Scenario	Determinant (Shifter)	Resulting Change
1. Population boom	Number of Consumers	Increase in Demand
2. Incomes fall due to recession	Income	Decrease in Demand
3. Price of hamburger (substitute) decreases	Price of Related Goods	Decrease in Demand
4. Price increases to $\$5$ for tacos	None (Price of good)	No Shift; Decrease in $Q_d$
5. New health craze - ‘No ground beef’	Tastes and Preferences	Decrease in Demand
6. Restaurants announce price hike NEXT month	Future Expectations	Increase in Demand
7. Price of salsa (complement) increases	Price of Related Goods	Decrease in Demand
8. Restaurants lower price of tacos to $\$0.50$	None (Price of good)	No Shift; Increase in $Q_d$

Academic Application: Paper 1 Part A Practice

Question: "Explain three factors that could lead to an increase in demand for cigarettes." [10 marks]
Required Elements for a High Mark (9-10): * Definition: Clearly define the term "demand." * Diagram: Include a diagram showing a rightward shift in the demand curve ( $D_1 \rightarrow D_2$ ). * Explanation: Fully explain three specific factors, such as: 1. A rise in consumer income (assuming cigarettes are a normal good). 2. Heavy promotion or advertising campaigns by producers. 3. Population growth or demographic changes (e.g., an increase in the number of people of legal smoking age). * Terminology: Use economic terms accurately throughout the response. * Examples: Provide relevant examples to support each explanation.