Demand Explained

Introduction to Demand

• Overview: Demand pertains to the behavior of buyers and consumers.

• Presenter: Mr. Clifford from AC/DC Econ.

• Example: Using milk consumption to explain demand concepts.

Law of Demand

• Definition: Inverse relationship between price and quantity demanded.

  • When price decreases, quantity demanded increases.

  • Demand schedule illustrates this (e.g., price goes down from $4 to $1, quantity demanded increases).

• Demand Curve: A graphical representation of the law of demand, slope is downward.

Reasons for Downward Sloping Demand Curve

1. Substitution Effect

   • If the price of milk decreases, consumers will buy more milk instead of more expensive alternatives (substitutes).

   • Conversely, if the price of milk increases, buyers will seek substitutes.

2. Income Effect

   • A decrease in milk price increases purchasing power, allowing consumers to buy more milk.

   • If the price increases, purchasing power decreases and consumers buy less.

3. Law of Diminishing Marginal Utility

   • As consumption of a good increases, the additional satisfaction (utility) from consuming an additional unit decreases.

   • Example: First sip of milk is most satisfying; subsequent sips provide less satisfaction.

Changes in Demand vs. Changes in Quantity Demanded

• Movement along the Demand Curve: A change in quantity demanded occurs due to price changes.

• Shift of the Demand Curve: A change in demand occurs when an external factor causes a shift to the left (decrease) or right (increase).

Factors Influencing Demand Shift (Shifters of Demand)

1. Taste and Preferences

   • Ex: If studies show milk improves academic performance, demand increases (curve shifts right).

2. Number of Consumers

   • An increase in consumers in a market raises demand for milk.

3. Price of Related Goods

   • Substitutes: Higher price of almond milk increases demand for cow's milk.

   • Complements: Lower price of cereal increases demand for milk.

4. Income

   • Normal Goods: Demand increases with income; decreases with falling income.

   • Inferior Goods: Demand decreases with income increases; increases with falling income.

5. Change in Expectations

   • Expectations of future price changes can influence current demand; expected price drops will lower current demand and vice versa.

Distinguishing Changes in Quantity Demanded from Changes in Demand

• Change in Quantity Demanded: Represented by movement along the demand curve (e.g., from A to B due to price change from $3 to $2).

• Change in Demand: Represented by a shift of the curve (from A to C) with no price change but influenced by shifters like preferences.

Conclusion

• Summary: Price changes affect quantity demanded, while external factors (shifters) affect overall demand.

• Final Note: Importance of understanding these concepts before moving on to supply-related topics.