Demand

• Demand is the quantity of a good or service that consumers are willing and able to buy at a specific price, at a specific period of time
• The factors that cause a shift in demand are(PASIFIC):

  • Population
  • Advertising
  • Substitutes and compliments
  • Income
  • Fashion and trends
  • Interest rates
  • Confidence
• The law of demand states that

  • For most products the quantity demanded varies inversely with its price
• A subsidy is an amount of money the government gives directly to firms to encourage production and consumption
• A tax is a compulsory payment to the government
• Price elasticity of demand is the responsiveness of quantity demanded to a change in price
• When:

  • PED > 1 (ignoring signs)= price elastic
  • PED < 1 = price inelastic
  • PED = 1 = Unitary price elastic
  • PED = 0 = Perfectly price inelastic
  • PED = Infinity = Perfectly price elastic
• Importance of Price elasticity of demand on producers:

  • Allows them to increase their revenue
  • Higher revenue = Higher profits , used for expansion
  • Revenue can help track what producers can sell well/ make more profit.
  • Revenue can be used to cover costs(e.g day to day and captal costs)
• Importance of price elasticity of demand on consumers:

  • Easier for choices to be made when purchasing a product, due to changes in price
  • Consumers who purchase goods with inelastic demand are affected because governments could impose high levels of taxation on these goods and services
• • If demand is price elastic, a firm should decease their price
  • This decrease in price will cause quantity demanded to increase by a larger proportion compared to the decrease in price
  • We can show this using a PED diagram
• Total revenue (TR) = Price(P) x quantity(Q)
• When the effect on demand is price elastic, a decrease in prices leads to an increase in quantity demanded, resulting in an increase in total revenue.
• When the effect on demand is price inelastic, a decrease in prices leads to a decrease in quantity demanded, resulting in a decrease in total revenue.
• When the effect on demand is price inelastic, an increase in prices leads to a decrease in quantity demanded, resulting in an increase in total revenue.