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Demand

Demand


·       Demand -  the quantity of a good or service that consumers will choose to buy at any given price in a given period. (prices determines quantity)

Law of Demand: ceteris paribus, as the price of a good or service increases, consumer demand for the good or service decreases, and vice versa. So there is an inverse relationship between quantity demanded and price, ceteris paribus.


·       Diminishing Marginal Utility and its effect on the demand curve

Each consecutive product halves in value as the benefit decreases.
e.g with chocolate at $2, people would buy one, but with chocolate at $1, people would only buy two because the third would be too much.

at low quantities, marginal utility is higher, so willingness to pay (WTP) is higher
As a person increases their consumption of a product, the utility of the product declines.
This causes the demand curve to slope downwards

The income effect also causes the curve to slope downwards.
      High prices reduce purchasing power, low prices enhance purchasing power.
 e.g. shopping at Fortnum and Mason you will buy less as your income won’t go as far (you’ll feel less well-off) whereas at Lidl you buy a lot because your income goes a long way.
As the price of a good falls real income (what your income enables you to purchase) rises, so consumers increase their demand.

The substitution effect states that consumers buy more of low-price goods and less of high-price alternatives.
e.g. If the price of choc went down and the price of ice cream stayed the same, people would purchase more chocolate and less ice cream, as they could get more for their money.
As the price of a good falls, it becomes less expensive relative to alternative products (assuming they stay at the same price), so consumers will switch for the higher priced alternative to the lower priced good, and demand for it will increase.


·       Meaning of movement along the curve (expansion or contraction of demand):

Changes in price cause movement along the demand curve, as quantity demanded changes.
-        Moving down the demand curve is an expansion.
-        Moving up the demand curve is contraction.

·       Factors that shift the demand curve:
An outwards shift can be caused by:
-        A decrease in the price of a complementary good
-        An increase in the price of a substitute good
-        An increase in real/disposable income. NB: for inferior goods the opposite is true: a decrease in real/disposable income causes an increase in demand.
-        A change in taste/preference making the good in question more desirable

-        Increased advertising
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