3a. Demand

\ The Law of Demand

All other factors being equal, as the price of a good or service increases, consumer demand for the good or service will decrease, and vice versa.

\ Why is the demand curve downward sloping?

  • Substitution Effect   * if the price of a good increases then consumers are likely to buy cheaper alternatives

    \

  • Income Effect   * if the price of a good increases then consumers will not be able to afford it so will not be able to buy as much

    \

  • Diminishing Marginal Utility   * each product provides progressively less satisfaction and hence consumers will not pay as much

    \

\  

Changes in price cause movement along the demand curve

When the price is cut from 80 to 60, there is an expansion/extension in quantity demanded from 300 to 500.

(The opposite is a contraction)

\  Quantity per week

\ What causes a shift in Demand?

  • Population   * Larger countries will have more consumers and hence a greater demand for products

    \

  • Advertising   * A successful marketing campaign can make the product more attractive increasing demand

    \

  • Price of Substitutes   * An increase in price for substitutes should increase the demand for alternatives

    \

  • Interest Rates   * If interest rates are lower it is cheaper to borrow people can afford to buy more + there is less incentive to save

    \

  • Fashion   * If a product becomes fashionable demand tends to increase

    \

  • Income   * An increase in income should lead to more money available to buy a good…   * …however, there will be less demand for inferior goods

    \

  • Price of Complements   * An increase in price for complements should decrease demand for the other product

    \

  • Weather   * In cold weather, there will be increased demand for fuel and warm-weather clothes.

    \

  • Expectations   * …of future price increases. A commodity like gold may be bought due to speculative reasons; if you think it might go up in the future, you will buy it now.

    \

  • Quality   * An increase in the quality of the good e.g. better quality digital cameras encourages people to buy one.

\ Shifts in the demand curve

  • If factors other than price change then the demand can shift. An increase in demand for the product will cause a shift to the right
  • A decrease in demand for the product will cause a shift to the left

  \