Demand

Demand: quantity of a particular good or service

consumers are willing and able to purchase at a
given point of time
Individual demand: the demands of an
individual
Market demand: the demand of all consumers
Factors affecting market demand 6.1
1. The price of the good its self
Whether the price of the good is worth its
utility and whether the consumer is willing to
pay for the good at its nominated price
*some goods and services are a necessity and
therefore need to be purchased regardless of
the price changes

2. The price of other goods and services
Whether the substitute good/service is
cheaper and provides more utility than actual
good
Demand for substitute good will increase
with the rising cost of the initial good
if the price of a complimentary good rises
the good will fall in demand

3. Expected future prices
The expectation of a rise in the value of a
good will encourage consumers to buy more
of the product
The expectation of a good or service to
plummet in price will cause consumers to wait
until the price had reached its minimum.










4. The changes in consumers tastes and
preferences
The demands of a consumer will change
according to age as it influences the tastes
and preferences of an individual and
therefore influence market demand
The changes in trends be it in the
technological or fashion industry. This will
change the demands as consumers will
attempt to keep up with the latest trend.

5. The level of income
A change in income levels
High income levels will mean a greater
demand for luxuries and goods and services
beyond the essential goods and services
needed in an individual life.
A low income level means consumers will
demand cheaper products with efficient usage
that it necessary in the everyday lives of
consumers
Consumer expectations
Spend more when expecting more income
spend less when expecting less income
A change in income distribution
Redistribution of income to higher earners
will increase demand for luxury goods

6. The size of the population and its age
distribution
The population will affect the quantity of
the demand
Age distribution will determine the type of
goods in demand

Behaviours of consumers may also affect the
demands in the market where an individuals demand
may be influenced by the type of people purchasing
the good/service.
The positive network externality (the bandwagon
effect)- occurs when people demand goods to fit in
with everyone else who has one
A negative network externality (the snob effect)-
occurs where demand for goods are higher due to its
rare qualities e.g. a limited edition art piece or car

The ceteris paribus assumption
- An assumption used in economics to isolate
the relationship between two economic
variables
- Latin for other things being equal
- Looking at how the a factor can be influenced
by another factor ignoring the other factors
that can affect the demand
- It is when the all the other factors that could
affect demand are assumed to remain
constant to focus on one catalyst that could
affect the demand of a good or service.

Movements along the demand curve 6.2
The demand schedule
- Focuses of the influence of price assuming
that all other factors that could influence
demand remain constant.
It represents the relationship between the price and
quantity demanded which is also referred to as the
law of demand. The law of demand states that
demand falls as price rises. This is because, when
costs fall, it is cheaper to purchase the good in
comparison to all the other goods and services and
the good becomes more affordable.
*exceptions apply to luxurious goods such as
fashionable restaurants and art which may rise
because they are more sought after status symbol.






























































The demand curve
The demand curve is the graphical representation of
the market demand schedule.
It typically slopes downwards from left to right and
illustrates the relationship between price and demand.


Movements along the curve
We obtain movements along the curve when there is
a change in price called contractions and expansions.
A contraction in demand occurs when an increase
from P2 to P1 causes the quantity demanded to fall
from Q2 to Q1
An expansion in demand occurs when a decrease in
price from P1 to P2 causes the quantity demanded to
rise from Q1 to Q2

Shifts of the demand curve 6.3
The demand curve shifts left or right in respective of
the quantity demanded.
Increase in demand
When the demand increases, the curve shifts
outwards to the right.
1. An increase in demand means consumers to
be are willing to buy more of the product at
the same price
2. An increase in demand also means that
consumers are willing to purchase a given
quantity at a higher price than before
A decrease in demand
The curve shifts inwards to the left
1. A decrease means that consumers are willing and
able to buy less of the product at each possible price
2. It also means that consumers are willing and able to
buy a given quantity at a lower price than before.


The main factors that cause shifts of the demand
curve
Factors that may cause an increase in demand
Prices of other goods and services
- If the prices of substitute goods rise, the
demand for the good will increase
- If the price of a complementary good fall, it is
also likely that the
Expected future prices
- If a consumer expects a good/service to
increase, they will demand more to obtain
them at the lowest cost
Consumer tastes and preferences
- If there is a trend in a particular shoes style, it
is likely that consumers will demand more of
the product
- New technology that has enabled the product
to be more desirable may also increase the
demand of the product
Consumer incomes
- A rise in the level of income will mean that the
consumers are able to afford more of the
product and therefore demand more
- A change in income distribution that if
favourable to the higher income earners will
raise the demand for a product and a high
quality
- Improved consumer expectations about the
future income and employment prospects will
also increase demands of products in general
as they are more willing to spend

The size and age distribution of the population
- An increase in population will increase the
overall demands for all goods whilst a smaller
or decreasing population will




Factors that may cause a decrease in demand
Prices of other goods and services
- A fall in price of substitute goods
- A rise in complementary goods
Expected future prices
- An expected decline in the price of the
product in the future
Consumer tastes and preferences
- Goods and services becoming out of trend
- Technological processes that causes a good to
be outdated
Consumer incomes
- A fall in the general amount of income
- A change in income distributions less
favourable to demand
- Deteriorating consumer expectations about
the economic prospects
The size and age distribution of the population
- a decrease in the overall size of the
population and a change in the age
distribution
Price elasticity of demand 6.4
Price elasticity is a measure of how vulnerable the
demand of a good or service in response to a change
in price. As a mathematical figure, it shows the
percentage change in a quantity of a good demanded
resulting from a 1% increase from its price.








Elastic demand- a strong response to change in price
Unit elastic demand- a proportional response to a price
change (total amount spent by consumers remain
unchanged
In elastic demand- a weak response to a price change
- If a change in price has a great impact on the
demand of a good, it is said to be relatively
elastic.
- If the demand of a price has a less
proportional change in price, it is said to be
relatively in elastic
- If the change the quantity demanded is equal
to the proportionate change in price, the price
is said to be unit elastic
The importance of price elasticity of demand
Price elasticity is most important to the government
and businesses
Business firms
Business firms need to understand the price elasticity
of demand for their goods to decide the optimum
pricing strategy.
- If demand is relatively elastic, the firm would
know they could increase their total revenue
and volume of sales by lowering the price.
- If demand was relatively inelastic, the firm
could increase the price, which would
increase the price which would also lead to an
increase in total revenue
- Awareness of the price elasticity is necessary
in determining the best pricing strategy and
making adjustments to the current pricing
- Price elasticity may cause a business to
engage in researches to find the demands of a
customer and the elasticity of its demand in
respective to price
The government
- The government needs to understand the
price elasticity of demand when pricing the
goods and services that it provides for the
community.
- It is also relevant to know the elasticity of
demand to predict the effect of change in
level of any indirect taxes (such as sales taxes,
excise duties and special levies that are
imposed on goods such as alcohol, petrol and
tobacco)
- The taxes will raise the price of the goods
affected and the government needs to be able

to predict the responsiveness in demand to
estimate the revenue they will make
Measuring price elasticity of demand
There are a number of ways of determining the price
elasticity of demand. One of them is to look at the
effect of changes in price on the total revenue earned
by the producer which is known as the total outlay
method.
Measuring price elasticity of demand
There are a number of ways of determining the price
elasticity of demand. One of them is to look at the
effect of changes in price on the total revenue earned
by the producer which is known as the total outlay
method.

Price elasticity and the slope of the demand curve
*the slope of the curve should not be used as a
measure of the price elasticity of demand.
The only times when the price elasticity is determined
by the entire graphs slope are the two extremes of
elasticity of demand- perfectly elastic demand and
perfectly inelastic demand.




Total outlay method: a way to calculate the price
elasticity of demand by looking at the effect of changes
in price revenue earned by the producer. (Looking at
profit made from the pricing)
If price and revenue move in the same direction,
demand is inelastic
If the price and revenue move in the opposite
direction, demand is elastic
If revenue remains unchanged in response to price
change, demand is unit elastic































Perfectly elastic demand
Perfectly elastic demand is a horizontal line. When
demand is perfectly elastic, consumers will demand
an infinite quantity at a certain price but nothing at
the price above this. (This is merely theoretical as it
only occurs when one type of the same good is sold at
the same price and there were many buyers and
sellers with all uniform pricing)


Perfectly inelastic demand
When demand is perfectly inelastic, the demand curve
is a vertical straight line. This shows that consumers
are willing to pay any price in order to obtain a given
quantity of a good. This is only theoretical and can
only be applied to certain situations in the real world
such as if a person has a life-threatening disease, they
will pay the price of anything to obtain the medication
needed.
















Factors affecting elasticity of demand 6.5
Whether the good is a luxury of a necessity
Goods and services that are necessary for the survival
of consumers tend to have relatively low elasticity
whereas luxuries tend to have a demand high
elasticity
Whether a good or service has any close substitutes
If there are many substitute brands available, a good
will have higher elasticity as people could simply
purchase a different brand with the same utility.
However, goods and services that dont have many
substitutes such as water and medical attention have
an in elastic demand since there are little options to
switch to.
The expenditure on the product as a proportion of
income
Goods and services that take up a lower proportion of
income will be inelastic whilst expensive items would
tend to be more elastic. E.g. an increase in a pen will
have less elasticity than increase in house prices
The length of time subsequent to a price change
When there is a price increase, there is a low response
initially as it takes time for consumers to become
aware of the prices and adjust. Consumers will place
research in alternative and substitute products which
make demand more responsive.
The consumers response to price change may also
depend on the durability of the good. After an initial
price change, durable goods tend to have a higher
elasticity than non-durable goods. E.g. the initial price
increase in cars will make consumers want to delay
the purchasing of a new car. Over time however, the
elasticity will decline since they will need to replace
their old cars.
Whether a good is habit forming
Goods such as alcohol and tobacco tend to be
inelastic in demand as they form habits and addictions.