2.2 Demand Flashcards
(16 cards)
demand
The willingness and ability to purchase a good or service at the given price in a given time period.
derived demand
Demand that has come about due to the demand for another product.
A good example of this is transport. Although some people do use transport just for the journey, most demand for transport is derived from the demand to commute to work, go on holiday or move goods from one place to another (see also Chapter 2.7).
law of demand (why?)
For most goods and services the quantity demanded varies inversely with the price, i.e. as the price rises the quantity falls, or as the price falls the quantity rises.
because:
as the price of a good or service falls, the consumers have more money left over so that they can buy more with the same amount of money
as the price of a good or service falls, more consumers are now able to afford the product, so they are likely to buy it
individual vs market demand
id: The demand for a good or service by an individual consumer.
md: The total demand for a good or service, found by adding together all individual demands.
factors that will shift demand curve
income
marketing
tastes and fashion
subs/compliments
population (size/age/gender)
government policies
economic situation
price expectations
how do these affect demand:
income
marketing
tastes and fashion
subs/compliments
how do these affect demand:
population
If the number of people in a country increases or decreases, it is likely that the demand for most goods and services will also increase or decrease. For example, an increase in population will put more demand on health services.
Change in the age of the population is also important. If a population ages so that there are more older people, it is likely that there will be an increase in demand for the type of goods they want or need. Older people may prefer cars to motorbikes or going on river cruises rather than activity holidays.
If there is an increase in the number of women in a country or in the number of women working and thus having more purchasing power, there is likely to be an increase in demand for goods women favour. This would be equally true if there were an increase in the number of men.
how do these affect demand:
government policies
economic situation
price expectations
consequences of shift in demand
The most important consequence of a shift of the demand curve is that it will lead, for nearly all products, to the price and quantity of the good or service moving in the same direction. If the demand increases then both the price and quantity will rise. If the demand decreases then both the price and quantity will fall.
The situation may not always be so straightforward. Some possible issues are:
if the price rises, but incomes rise faster, consumers will be able to demand more petrol, for example, despite the price rise
demand for substitute products will fall if people prefer other goods and services
the increase in demand may allow producers to gain greater economies of scale (see Chapter 2.6). This could allow them either to cut the price, which means movement down the demand curve, or to enjoy higher profits
if demand falls, producers may go out of business if they can no longer make a profit, e.g. BHS or Austin Reed in 2016
consequences of movement along demand curve
PED
interpreting PED values
price elastic vs price inelastic demand curve
perfectly price elastic vs price inelastic demand curve
effect of PED on consumers
effect of PED on producers
Producers can use their knowledge of the price elasticity of demand for their products to increase their total revenue (see Chapter 2.6).
Knowing the value of elasticity, the producer would be able to calculate the effect on quantity of a change in price. If the product had an elastic demand then cutting the price would lead to a larger percentage rise in quantity so total revenue would increase. The reverse will be the case for price inelastic demand. In other words, the producer could raise the price to increase revenue. The various possibilities are shown in Table 2.2.7
