Ch 3 - Demand 

  • Market: where buyers and sellers get together to trade
      * Housing market (goods and services)
      * Stocks (shares)
      * Factor (factors of production)
      * International markets (international currencies)

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  • Demand: the quantity of a product which consumers are willing and able to buy
  • Quantity: numerical quantity of a product being demanded
  • Effective demand: by purchasing power, the purchaser has the money to pay for the product
  • Ineffective demand: do not have purchasing power
      * Law of demand: states that as the price of product falls, the quantity demanded will increase

 

  • Based on the graph, we can see these trends:
      * When the price goes up, there's a decrease in quantity demanded
      * When price goes down, quantity demanded increases

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  • Factors influencing demand (PINTE):

  
  1. Income: the income of all consumers

     a. Income + demand have a positive relationship:
     * Increase in ability to pay equals increase in demand, If the ability to pay falls then less is demanded (direct relationship)
     * Inferior goods have a negative relationship (customers buy less, inverse relationship)

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  1. Price:
       * Substitutes: alternative goods can satisfy the same want and need
         * A change in the price of one has an impact on the demand
       * Complements: goods which have a joint demand as they enhance the satisfaction derived from another good
         * A change in the price/availability of either will have an effect on the demand for complementary goods

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  1. Fashion, taste, and attitude: demand is affected by personal behaviour /preference. As consumer behaviour and preference changes, so does the degree of demand of a good or service.

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  • To increase demand:
      * Income rises (normal goods)
      * Price of substitution rises
      * Price of complementary falls
      * Encouraged buying
      * Population likely to buy increases

 

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  • To decrease demand:
      * Income drops
      * Substitution falls
      * Compliments rises
      * Buying discouraged

     

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  • PINTE:
      * Prices
      * Income
      * Number of buyers
      * Taste/preference
      * Expectations

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  • Movement along the Demand curve:
      * Rise in price = drop in demand
      * Drop in price = increase in demand

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  • A demand shift can shift:
      * Left (decrease demand)
      * Right (increase demand)

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  • Based on the graph, we can tell that these changes occur in the economy:
      * D2: how quantity demanded responds to a change in prices
      * D1 and D2: shows how demand responds to a change in a non-price factor

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  • Bounded rationality: theory that consumers have limited rational decision making driven by cognitive ability, time constraint, and imperfect information
      * Profit: total revenue - total costs
      * Status quo: overwhelming amount of choices
      * Complementary goods: demand decreases, quality demand decreases
      * Substitute goods: demand increases, quality demanded decreases

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  • Basic rules of movement along the demand curve and what it means:
      * decrease in price = expansion in demand = increase in quality demanded
      * increase in price = contraction in demand = decrease in quantity demanded

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