Skip to main content

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
Labels:

Comments

Post a Comment

Popular posts from this blog

Income elasticity of demand (YED)

    Income elasticity of demand (YED)         % D QD/% D Y             Income elasticity of demand (YED): the responsiveness of the quantity demanded of a good to changes in consumer income. YED allows us to work out which goods are inferior, luxury and normal. When YED > 1 or <-1, demand is elastic. When YED is between -1 and 1, demand is inelastic. When YED < 0, goods/services are inferior. This means as income rises, demand for these goods decreases. (e.g. bus tickets) They vary inversely with income. When YED < -1, goods are very inferior (e.g. own-brand labels, cheap cuts of meat). When YED = 0, demand for the good is independent of income. When YED > 0, goods/services are normal. Demand for these goods vary directly with income, and the state of the economy. When YED is between 0 and 1, goods/services are necessary. When income increases, demand for these goods go up a proportional...
Post a Comment
Read more

The Philips curve

The Philips curve  The Philips curve suggests a tradeoff between unemployment and inflation - to decrease unemployment, inflation has to rise. This creates a conflict between two macroeconomic objectives - targeting inflation at 2% (in the UK) and decreasing unemployment. 
Post a Comment
Read more

3.1.3 Demergers

Demergers   A demerger is the breaking up of a firm into separate firms.  e.g Sports Direct selling off Dunlop in 2016. PepsiCo splitting off foods businesses (KFC, Taco Bell, etc.) into a separate corporation, Yum Brands. Later Yum Brands demerged into Yum China and Yum Brands. Reasons for demergers Diseconomies of scale - the opposite of economies of scale, where average costs begin to rise as output increases. May occur due to it being difficult to retain control on the expanding business - principal-agent problem may arise. Also less co-operation by employees who feel more alienated and as a result less productive - they feel less of a connection to the business.  May also be hard to co-ordinate and communicate between locations and employees when a firm is large. Miscommunication can again lead to costs rising.  To focus on core businesses to streamline costs and improve profits. The firm may have expanded into different markets and expe...
Post a Comment
Read more