2.2 DEMAND

• DEMAND: willingness and ability to purchase a good or service at a given price in a given time period.
• DERIVED DEMAND: when the demand for one good

  comes from demand for another good.
• LAW OF DEMAND: price and quantity demanded are inversely related.
• FACTORS WHICH CAN CAUSE DEMAND TO SHIFT:

  ● Consumer incomes

  ● Prices of substitutes

  ● Price of complements

  ● Tastes and fashion

  ● Advertising

  ● Population
• PRICE ELASTICITY OF DEMAND: the responsiveness of

  quantity demanded to changes in price
• Price ELASTIC demand: a % change in price leads to a

  larger % change in quantity demanded
• Price INELASTIC demand: a % change in price leads to a

  smaller % change in quantity demanded
• A good will tend to have inelastic demand if…

  ● There are few substitutes

  ● It is a necessity

  ● It is addictive
• A good will tend to have elastic demand if…

  ● There are many substitutes

  ● It is a luxury

  ● It is not addictive
• PRODUCERS USE PED TO MAKE PRICING DECISIONS THAT RESULT IN HIGHER REVENUE

  • If PED is elastic then producers will reduce prices to increase total revenue.
  • If PED is inelastic then producers will increase prices to increase total revenue.
  • However, firms can’t always calculate PED accurately.
  • Also, other factors may be more important, e.g. consumer incomes.
• When PED is inelastic, producers are likely to

  increase prices to increase revenue. This harms

  consumers.

  ● When PED is elastic, producers may decrease prices

  to increase revenue. This benefits consumers.

  ● Governments may impose taxes on goods with

  inelastic PED to raise tax revenue.

  However, other factors may be more important, e.g.

  consumer incomes. PED is more significant for

  producers.