Demand Summary

Demand

Definition

  • Demand is the quantity of a good or service that customers are willing and able to buy at a given price in a given period of time.

Impact of Price Changes on Demand

  • Contraction in demand: A rise in the price of a product (P1 → P2) leads to a decrease in quantity demanded.

  • Extension in demand: A fall in the price of a product (P1 → P2) leads to an increase in quantity demanded.

Factors Affecting Demand (Excluding Price)

  • Fashions, tastes, and preferences

  • Changes in consumer incomes

  • Prices of complements

  • Prices of substitutes

  • Marketing, advertising, and branding

  • Demographic changes

  • Seasonality

  • External shocks: new competitor, government policies, the economy, social & environmental factors

Impact of Various Factors on the Demand Curve

  • Changes in preferences/tastes (e.g., vegan diets):

    • Demand curve shifts outwards, leading to an increase in demand.

  • Changes in consumer incomes:

    • Normal goods: Demand increases as incomes rise.

    • Inferior goods: Demand may fall as incomes rise.

  • Changes in prices of complements (e.g., cars and petrol):

    • Increase in the price of a complement leads to an inward shift of the demand curve and a decrease in demand.

  • Changes in prices of substitutes (e.g., Coca Cola and Pepsi Cola):

    • A decrease in the price of a substitute leads to an inward shift of the demand curve and a decrease in demand.

  • Changes in marketing, advertising, and branding:

    • Increased advertising leads to an outward shift in the demand curve, resulting in an increase in demand.

  • Demographic changes (e.g., falling birth rate):

    • Leads to an inward shift of the demand curve, decreasing demand.

  • Seasonality (e.g., water pistols during Songkran):

    • Causes an outward shift of the demand curve, leading to increased demand.

  • External shock: new competitor:

    • Entry of a new competitor leads to an inward shift of the demand curve, decreasing demand.

  • External shock: Government actions:

    • New laws or regulations can shift the demand curve outwards, increasing demand.

  • External shock: social & environmental:

    • Increased awareness of environmental issues leads to changes in demand for certain goods and services.

  • External shock: The economy:

    • Economic factors (e.g. recession) can lead to a fall in demand.

Demand Questions - Illustrative Examples:

  1. Government raises interest rates:

    • Impact on demand curve for new condos.

  2. Government study on diet soda harm:

    • Effect on demand for Pepsi Max.

  3. Mad cow disease increases milk price:

    • Impact on demand curve for breakfast cereals.

  4. Increase in price of private healthcare:

    • Effect on demand for private healthcare.