demand

• What assumptions do neoclassical economists make ?


  consumers maximise utility - happiness or satisfaction
• what are neoclassical economists second assumption?


  Firms will maximise profit
• profit = total revenue - total cost
• total revenue - how much money a business gets from its sales
• why wont firms want to maximise sales or total revenue?


  profit takes into account both revenue and cost. Maximising sales or total revenue does not take into account cost and can lead to some very bad decisions
• behavioural economics - a method of economic analysis that applies psychological insights into human behaviour to explain economic decision making
• herd behaviour - when individuals act collectively as part of a group, often making decisions as a group that they would not make as an individual
• habitual behaviour - a cause of irrational behaviour, when consumers are in a habit of making certain decisions
• demand - willing and able to buy it
• demand curve 


  • inverse relationship
  • shows the relationship between the price and quantity demanded of a good or service

  
• contraction in demand 


  increase in price leads to a decrease in quantity demanded
• extension in demand 


  when a decrease in price leads to an increase in quantity demanded
• law of diminishing marginal utility - the value or utility that individual consumers gain from the last product consumed falls the greater the number consumed , this is why the curve is downward sloping.
• price elasticity of demand -measures how much quantity demanded will respond to a change in price
• what is the calculation for PED


  % change in quantity demanded /% change in price

  
• elastic demand 


  • -1 - infinity
  • very responsive to price change
• inelastic demand 


  • -1 - 0
  • unresponsive to change in price
• unitary elastic demand 


  • -1
  • change in price will lead to a change in quantity of the same size

  
• perfectly inelastic 


  the demand for the product will remain consistent regardless of any price change

  
• perfectly elastic 


  a situation in which quantity demanded is extremely sensitive to price change

  
• factors that influence PED - nasbit 


  • necessity
  • addiction and habit
  • substitutes
  • brand loyalty
  • proportion of income
  • time period
• necessity and luxury

  • a necessary good ,such as bread or electricity , will have a relatively inelastic demand even if the price increases significantly, consumers will still demand bread and electricity because they need it.
  • luxury goods , such as a holiday , are more elastic. If the price of flights increases , the demand is likely to fall significantly
• substitutes

  • crisp can be elastic because there are several substitutes
  • an Iphone charger is inelastic as there are fewer substitutes
• addiction and habit

  The demand for goods such as cigarettes is not sensative to a change in price because consumers are addicted to them meaning it is inelastic
• brand loyalty

  • a Ferrari is inelastic as it is known for its high prices
  • a Nissan is elastic as it is known for its low prices
• time period

  • short run is inelastic
  • The long run is elastic - have more time to consider a purchase and more time to find substitutes
• factors that influence demand 


  • consumer taste
  • prices of other goods
  • consumer income
  • population or size of market
• profit


  = total revenue - total cost
• total revenue 


  = price x quantity
• inelastic and total revenue


  price increases - total revenue increases

  price decreases - total revenue decreases
• unitary elastic and total revenue 


  total revenue doesn't change
• contraction in demand 


  when quantity demanded falls due to price rising

  
• extension in demand 


  demand increases when there is a fall in price

  
• affect of a demand curve 


  • advertising , fashion and trends
  • population and age structure
  • seasons
  • normal and inferior goods
  • complements and substitutes
• advertising fashion and trends 


  if a firm markets their brand on billboards it will increase the demand for the product so the demand curve will shift to the right
• population and age structure 


  if the population increases the demand for TVs would increase but if the population decreased the demand for TVs would decrease

  increase in demand:

  
• seasons 


  when it turns cold and winter come , people may want to buy skis for family holidays. This will increase the demand for skis but when winter is over the demand for skis will decrease as spring comes

  decrease in demand:

  
• normal and inferior goods 


  • normal goods
  • demand increases when income rises
  • demand decreases when income falls
  • inferior goods
  • if consumers got a pay rise they would not want to buy non branded icecream, they would but branded ice cream such as Ben and Jerrys
  • demand decreases when incomes rise
  • demand increases when incomes fall
• complementary goods


  • goods which are bought and used together
• complementary goods - first goods will increase when price of second good falls, and demand for the first good will decrease when price of second good falls