Demand curves

• What is demand?

  • Demand is the amount of a good/service that a consumer is willing and able to purchase at a given price in a given time period
  • Effective demand is demand supported by the necessary purchasing power (the ability to pay)
  • If a consumer is willing to purchase a good, but cannot afford to, it is not effective demand
• What is a demand curve?

  • A demand curve is a graphical representation of the price and quantity demanded (QD) by consumers
  • If the data were plotted, it would be an actual curve.  Economists, however, use straight lines so as to make analysis easier
• What is the law of demand?

  • The law of demand states that there is an inverse relationship between price and quantity demanded (QD), ceteris paribus
  • When the price rises, the QD falls
  • When the price falls, the QD rises
• What is market demand?

  • Market demand is the combination of all the individual demand for a good/service
  • It is calculated by adding up the individual demand at each price level  
  • Individual and market demand can also be represented graphically
• What happens if price is the only factor that change (ceteris paribus)?

  • If price is the only factor that changes (ceteris paribus), there will be a change in the quantity demanded (QD)
  • This change is shown by a movement along the demand curve
• What does contraction and extension in quantity demanded mean?

  • Due to the increase in price, the QD has fallen.
  • This movement is called a contraction in QD
  • Due to the decrease in price, the QD has increased .
  • This movement is called an extension in QD

  
• What are the conditions that shift the entire demand curve? (PIRATES)

  • Changes in real income
  • Changes in tastes/preferences
  • Changes in the price of related goods (substitutes and complements)
  • Changes in the number of consumers
  • Future price expectations
• Explain how changes in real income shift the demand curve? State which way the demand curve shifts.

  Changes in real income

  • Real Income determines how many goods and services can be purchased by consumers
  • There is a direct relationship between income and demand for goods/services 
  • Normal goods have a positive relationship with income, as income rises, demand rises, and vice versa
  • Inferior goods have an inverse relationship with income, as income rises, demand falls, and vice versa

  Income Increases

  D Increases Shifts Right( D→D1)

  Income Decreases

  D Decreases Shifts Left(D→D2)

  
• Explain how changes in tastes/preferences shift the demand curve? State which way the demand curve shifts.

  • Changes in the price of substitute goods will influence the demand for a product/service
  • There is a direct relationship between the price of good A and demand for good B
  • E.g. The price of a Sony 60" TV (good A) increases so the demand for LG 60" TV (good B) increases

  Price of Good A Increases

  D for Good B Increases Shifts Right(D→D1)

  Price of Good A Decreases

  D for Good B Decreases Shifts Left(D→D2)
• Explain how changes in the prices of substitute goods shift the demand curve? State which way the demand curve shifts.

  • Changes in the price of substitute goods will influence the demand for a product/service
  • There is a direct relationship between the price of good A and demand for good B
  • E.g. The price of a Sony 60" TV (good A) increases so the demand for LG 60" TV (good B) increases

  Price of Good A Increases

  D for Good B IncreasesShifts Right(D→D1)

  Price of Good A Decreases

  D for Good B DecreasesShifts Left(D→D2)
• Explain how changes in the price of complementary goods shift the demand curve? State which way the demand curve shifts.

  • Changes in the price of complementary goods will influence the demand for a product/service
  • There is an inverse relationship between the price of good A and demand for good B
  • For example, the price of printer ink (good A) increases so the demand for ink printers (good B) decreases

  Price of Good A Increases

  D for Good B DecreasesShifts Left(D→D2)

  Price of Good A Decreases

  D for Good B IncreasesShifts Right(D→D1)
• Explain how changes population (number of consumers) shifts the demand curve. State which direction the curve shifts?

  • If the population size of a country changes over time, then the demand for goods/services will also change
  • There is a direct relationship between the changes in population size and demand
  • Demand will also change if there is a change to the age distribution in a country, as different ages demand different goods and services, e.g an ageing population will buy more hearing aids

  Population Increases

  D Increases Shifts Right(D→D1)

  Population Decreases

   D Decreases Shifts Left(D→D2)
• Explain how future price expectations can shift the demand curve. State the direction that it shifts in.

  • If consumers expects the price of a good/service to increase in the future, they will purchase it now, and demand will increase
  • If consumers expects the price of a good/service to decrease in the future, they will wait to purchase it later, and demand will decrease

  Expectations price will rise

  D IncreasesShifts Right(D→D1)

  Expectations price will fall

  D DecreasesShifts Left(D→D2)