Demand

From ZuluNotes - Free Leaving Cert Notes

Demand is given by the equation:

Dx=f{Px,Ps,Pc,Y,T,E} or D= f{P1, P2, P3, Y, T, A, Exp)

This means that Demand for a product (how much people want it) is influenced by several criteria: The Price of the good, the Price of substitute goods, the Price of complimentary goods, The Consumer's Income, the taste of consumers and Future expectations.

Demand is typically characterised by the normal law of demand. This implies that when the price of a good increases, the demand for it will fall, since consumers have finite resources. Thus the slope of the demand curve is downward sloping. The degree of this change in demand is expressed as it's elasticity.

Contents 1 Factors 1.1 Price 1.2 Price of a Substitute 1.3 Price of Complimentary goods 1.4 Income 1.5 Consumer Tastes 1.6 Advertising 1.7 Expectations 2 Exceptions 3 See Also

Factors

Price

The selling price of the good itself causes a movement along the demand curve. If the price rises, the quantity demanded will go down. If the price falls, the quantity demanded will rise. This is called the Law of Demand.

Price of a Substitute

Changes in the selling price of a close substitute will cause a shift in the demand curve. Take for example Coke and Pepsi. If the price of Pepsi drops, People will (in theory) buy more Pepsi and less Coke, and therefore the quantity demanded for coke would fall. In economics, this is explained by an Inward Shift in the demand curve. This shows that, even though the price of Coke remained unchanged, the Demand fell.

Price of Complimentary goods

Cigarettes and Matches are complimentary goods. If the selling price of Cigarettes goes up, less people will smoke, and therefore less people will buy matches, so the demand curve for matches will shift inwards, causing a drop in demand for matches. This is the relation between Complimentary goods.

Income

The level of a consumers real income causes shifts in their demand. If the general level of income rises, the demand curve shifts outwards, as people demand more at the same price, because they can afford more.

Consumer Tastes

Consumer tastes and trends cause movements in the demand curve. For example, Global Warming and climate concerns would cause an outward shift in the demand curve for green products (Hybrid Cars, renewable energy) and an inward shift in things that are seen to harm the environment.

Advertising

A good advertising campaign will shift the demand curve outwards.

Expectations

Expectations upon the future price of a good can shift the demand curve. Property, for example, had a high demand in Ireland because the expectation was that price would rise. Now the demand curve has shifted inwards, with less people willing to buy as they expect prices may fall.

Exceptions

1. Goods of Ostentation(Snob Value): These are goods that are demanded because of their exclusive price, and therefore as price rises, demand rises too.
2. Goods of Addiction: Drug addicts act rationally.
3. Goods of Expectation: If goods rise in price and are expected to keep doing so, the demand for them will rise.
4. Giffen Goods: They obey the law of the demand, but are inferior goods, therefore as income rises, the demand for that good falls (usually because you can afford something better).

See Also

• The Price Effect (the income and substitution effects)