3a. Demand

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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.

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Why is the demand curve downward sloping?

• Substitution Effect

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

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• 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

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• Diminishing Marginal Utility

  • each product provides progressively less satisfaction and hence consumers will not pay as much

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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)

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What causes a shift in Demand?

• Population

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

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• Advertising

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

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• Price of Substitutes

  • An increase in price for substitutes should increase the demand for alternatives

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• Interest Rates

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

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• Fashion

  • If a product becomes fashionable demand tends to increase

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• Income

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

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• Price of Complements

  • An increase in price for complements should decrease demand for the other product

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• Weather

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

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• 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.

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• Quality

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

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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

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