Chapter 4: Market economy

Individual demand: Refers to the quantity demanded of a good or service by an individual consumer at different times

Market demand: Refers to the aggregate quantity demanded by all consumers at different prices

Derived demand: Deals with factors of production. It is demand for a good for the production of another good e.g. steel, wood are demanded because they can make multiple products.

Composite demand: Where goods have more than one use therefore an increase in demand for one product can result in a fall of supply of another e.g. milk has multiples uses, it can be used to make ice cream, cheese and yoghurt. If there is an increased demand for ice cream because it is summer, the milk supplier will sell more milk to the ice cream supplier to make icecream products instead of to the yoghurt supplier to make yoghurt products.

Joint demand: refers to complimentary goods. Complimentary goods are those where a rise in demand for one causes a rise in demand for the other. e.g. printers and ink, dvd and dvd players.

Effective demand: is demand that is supported by necessary purchasing power, it refers to willingness and ability of consumers to purcase goods and services at different prices e.g. I might purchase three products a week but if I experience a drop in income I might only purchase one or two.

The law of demand states that as the price of goods and services rises, the quantity demanded will fall, and as the price falls, the quantity demanded will rise

+P = -qd

-P = +qd

Exceptions the law of demand:

Snob goods or luxury goods, These are bought because their high price makes them more attractive to the consumer. An increase in price may actually make them more attractive to the consumer who can afford it. This is known as conscious consumption.

Giffen goods are goods which:

Are necessary

has few or no substitutes

Those who have lower incomes purchase them

When price rises demand will remain the same

Examples include milk, bread, rice, potatoes

Goods where demand is affected by expectation: When the price of an item usually starts to fall, usually due to an economic downturn or recession, the buyer usually defers their purchase in the hope that they will be able to purchase the same product for a cheaper price in the future.

The demand curve

A movement along the demand curve is only affected by a change in price

Note