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)

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